In an interest-rate swap transaction, Large corporation Limited can borrow in the bond market at a current fixed rate of 9 percent and ca n also

In an interest-rate swap transaction, Large corporation Limited can borrow in the bond market at a current fixed rate of 9 percent and can also obtain a floating-rate loan in the short-term market at the prime bank rate. However, this firm wishes to borrow short-term because it has a large block of assets that roll over into cash each month. The other party to the swap is Small corporation Limited, with a lower credit rating that can borrow in the bond market at an interest rate of 11.5 percent and in the short-term market at prime plus 1.50 percent. Small corporation Limited has long-term predictable cash inflows, however. Large corporation Limited wishes to pay for its part in the swap an interest rate of prime less 50 basis points. Small corporation Limited is willing to pay the underwriting cost associated with the Large corporation Limited ‘s security issue, which is estimated to be 25 basis points. The swap transaction is valued at US$100 million

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