What are the net payments for ABC and XYZ

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Reference no: EM132211759

Question - ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company can borrow funds either at an 11 percent fixed rate or at LIBOR + 3. XYZ Company can borrow funds either at a 10 percent fixed rate or at LIBOR + 1. Assume that ABC borrows at a fixed rate and XYZ borrows at a floating rate. The two companies enter into a swap whereby XYZ pays 11% to ABC and ABC pays LIBOR + 2.5% to XYZ.

a. What are the net payments for ABC and XYZ if they engage in the swap?

b. Are the companies better off? If so, by how much?

Reference no: EM132211759

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