CMA Final · Strategic Financial Management · Swaps
Firm A can borrow fixed at 9% or floating at MIBOR + 1.0%. Firm B can borrow fixed at 11% or floating at MIBOR + 2.0%. They enter a swap and share the total quality spread benefit equally. What is the total saving available to the two firms together?
The total gain is 1.0% per annum. The gap in fixed rates is 2.0% and the gap in floating spreads is 1.0%, so the quality spread differential is their difference, 1.0%. Shared equally, each firm saves 0.5%.
- A1.0% per annumCorrect
- B2.0% per annum
- C0.5% per annum
- D1.5% per annum
Explanation
Difference in fixed rates = 11% - 9% = 2.0%. Difference in floating spreads = 2.0% - 1.0% = 1.0%. Quality spread differential = 2.0% - 1.0% = 1.0%, which is the total gain; each firm gets 0.5%. Choosing 2.0% uses only the fixed-rate gap and ignores the floating gap.
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