1.  Develop a different arrangement of interest payments among the counterparties and the swap bank in Example 10.1 that still leaves each counterparty with an all-in cost 1/2 percent below each’s best rate and the swap bank with a 1/4 percent inflow.

2.  Alpha and Beta Companies can borrow at the following rates.

            Alpha               Beta

Moody’s credit rating                           Aa                    Baa

Fixed-rate borrowing cost                    10.5%              12.0%

Floating-rate borrowing cost                LIBOR             LIBOR + 1%

a.  Calculate the Quality Spread Differential (QSD).

b.  Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs.  Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.

3.  Company A is a AAA-rated firm desiring to issue five-year FRNs.  It finds that it can issue FRNs at six-month LIBOR + 1/8 percent or at the six-month Treasury-bill rate + ½ percent.  Given its asset structure, LIBOR is the preferred index.  Company B is an A-rated firm that also desires to issue five-year FRNs.  It finds that it can issue at six-month LIBOR + 5/8 percent or at the six-month Treasury-bill rate + 1 5/8 percent.  Given its asset structure, the six-month Treasury-bill rate is the preferred index.  Assume a notional principal of $15,000,000.  Determine the QSD and set up a floating-for-floating rate swap where the swap bank receives 1/8 percent and the two counterparties share the remaining savings equally.

4.  Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows:  7.75 – 8.10 percent annually against six-month dollar LIBOR for dollars and 11.25 – 11.65 percent annually against six-month dollar LIBOR for British pound sterling.  At what rates will Morgan Guaranty enter into a $/£ currency swap?

 *5.  A corporation enters into a five-year interest rate swap with a swap bank in which it  agrees to pay the swap bank a fixed-rate of 9.75 percent annually on a notional amount of DM15,000,000 and receive LIBOR – ½ percent.  As of the second reset date, determine the price of the swap from the corporation’s viewpoint, assuming that the fixed-rate at which it can borrow has increased to 10.25 percent.