fin536_ex_6[1]

fin536_ex_6[1] - Fin536 Exercises 6 Interest Rate and...

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Fin536 Exercises 6 Interest Rate and Currency SWAPS 1. (interest rate SWAP)Xavier Manufacturing and Zulu Products both seek funding at the lowest possible cost. Xavier would prefer the flexibility of floating rate borrowing, while Zulu wants the security of fixed rate borrowing. Xavier is the more credit-worthy company. They face the following rate structure. Xavier, with the better credit rating, has lower borrowing costs in both types of borrowing. Xavier wants floating rate debt, so it could borrow at LIBOR+1%. However it could borrow fixed at 8% and swap for floating rate debt. Zulu wants fixed rate, so it could borrow fixed at 12%. However it could borrow floating at LIBOR+2% and swap for fixed rate debt. Assumptions Xavier Zulu Credit rating AAA BBB Fixed-rate cost of borrowing 8.000% 12.000% Floating-rate cost of borrowing: LIBOR+1.000% LIBOR+2.000% a. Describe what they should do to lower their borrowing costs? b.
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fin536_ex_6[1] - Fin536 Exercises 6 Interest Rate and...

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