Description of this paper

Carter Enterprises can issue floating-rate debt at...

Description

Solution


Question

Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed rate debt at 10%. Brence Manufacturing can issue floating-rate debt at Libor + 3.1% or fixed rate debt at 11%. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter makes a fixed rate payment of 7.95% to Brence and Brence makes a payment of LIBOR to Carter. What are the net payments of Carter and Brence if they engage in a swap? Would Carter be bettter off if it issued fixed-rate debt or if it issued floating rate and engage in the swap? Would Brence be better off if it issued floating rate debt or if it issued fixed rate debt and engage in the swap?

 

Paper#5518 | Written in 18-Jul-2015

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