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Using Swaps to Improve Loan Conditions. Please see questions below:
Questions
Suppose your company wishes to borrow at a fixed rate, and another one wishes to borrow at a variable rate.
Your company can borrow at a fixed rate of 8.5%, or at a floating rate of LIBOR 50bp. The other company (the potential counter-party) can borrow at a fixed rate of 7%, or at a floating rate of LIBOR 25bp.
– Does your company have any comparative advantage compared to the other company?
– In which rate market does your company have that comparative advantage (if any)? (In the floating rate market or in the fix rate
market?)
If the two companies decide to enter into a fix-for-floating interests swap and… … your company pays the other one a 7.2% … the other company pays yours a Libor%
What is your opinion?
– Has one of the two companies lowered their cost and the other one has incurred in higher costs? Or have both counterparties lowered their expenses?
– To what extent?
– If the swap agreement is done, what will be the cost of the loan for your company?