answer the question 350

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Borrowing costs of a firm, XYZ Inc., and a Project are as follows:

Fixed rate market

Floating rate market

Project

6.5%

Libor + 1.5%

XYZ Inc.

4%

Libor + 0.5%

The project has a floating rate loan with Libor + 1% rate and wants to convert it into a fixed-rate loan to avoid the interest rate risk. Show how it can achieve this objective by entering into a swap deal with XYZ Inc. whose borrowing costs in the fixed and the floating rate markets are given in the able. Use a cash flow diagram to explain your answer.

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