The Following Information Is Given Both Parties Want to Engage in an Interest Rate Swap

Essay

The following information is given:
$\begin{array}{lll}&\text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Borrowing Cost }\\\text { X Company: } & 5 \% & \text { LIBOR } \\\text { Y Company: } & 7 \% & \text { LIBOR }+1.3\end{array}$ Both parties want to engage in an interest rate swap.Assume that S Bank will arrange for an interest rate swap between X Company and Y Company for 0.1%.Also,assume that X Company gets 2/3 of the interest savings available.
a)Which company has a better credit rating?
b)What is the quality spread differential?
c)What is X Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
d)What is Y Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
e)Illustrate the cash flows from this swap.Assume that X Company pays LIBOR to S Bank.