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Company A desires a variable-rate loan but currently has a better deal from the fixed-rate market at a rate of 13%. If Company A borrows from the variable-rate market, the cost would be LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan, has a better deal from the variable-rate market at LIBOR+3%. If Company B borrows from the fixed-rate market, the cost would be 16%. Knowing both companies’ needs, Bank C designed a swap deal. The deal is outlined in the following:
1) Company A obtains a fixed-rate loan at 13%.
2) Company B obtains a variable-rate loan at LIBOR+3%
3) Company A pays Bank C a variable rate of LIBOR+1% and receives a fixed rate of 13.3% from the bank.
4) Company B pays Bank C a fixed rate of 14.5% and receives a variable rate of LIBOR+2.0% from the bank.
What is the spread differential between Companies A and B?
a. 2%
b. .5%
c. 1.5%
d. 1%
e. 2.5%
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