Harold Enterprises can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 12%. John Manufacturing can issue floating-rate debt at LIBOR + 1.5% or fixed rate debt at 12%. Suppose Harold issues floating-rate debt and John issues fixed-rate debt. They are considering a swap in which Harold makes a fixed-rate payment of 10% to John and John makes a payment of LIBOR to Harold. What are the net payments of Harold and John if they engage in the swap? Would Harold be better off if it issued fixed-rate debt or if it issued floating-rate debt and engaged in the swap? Would John be better off if it issued floating-rate debt or if it issued fixed-rate debt and engaged in the swap? Explain your answers.
Paper#26900 | Written in 18-Jul-2015Price : $27