Reference no: EM132459857

Problem: Betsu, Inc. has previously issued a bond that currently has 7 years left until maturity. The coupon rate of the bond is tied to LIBOR (specifically, its rate is LIBOR + 5%). The CFO expects interest rate movements to negatively affect the interest expense generated by this debt obligation. Therefore, she wishes to effectively change her liability from floating to fixed. The most recently issued Treasury Note is yielding 6%.

The CFO of Betsu, Inc contacted several banks that quote her the following:

Bank A: "We will refinance your current debt at an "all-in" annual cost of 10.55%. This will include all the expenses of retiring the current debt and issuing new debt at a fixed coupon."

Bank B: "We will offer you a LIBOR+2% based, 50-75 interest rate swap."

Bank C: "We will offer you a PRIME+3% based, 45-48 interest rate swap. In addition, we have a basis swap available: LIBOR - 1% for PRIME + 2%."

Which bank offers the CFO the best net borrowing position, assuming that she wants to effectively change her liability into a fixed obligation?