Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their
external borrowing opportunities are shown below.
Fixed-Rate
Floating-Rate
Borrowing Cost
Borrowing Cost
Company X
10%
LIBOR
Company Y
12%
LIBOR + 1.5%
A swap bank is involved and offers the following rates for five-year dollar interest rate swaps: 10.05% - 10.45% against LIBOR.
(1) What is the Quality Spread Differential (QSD)?
(2) Can both companies benefit if they accept the swap bank's quoted rates? If so, how much can each company save
annually?
(3) What is the annual profit in $ earned by the swap dealer?