Alpha and Beta Companies can borrow for a five-year term at the following rates:                                                                Alpha               Beta Moody’s credit rating                            Aa                    Baa Fixed-rate borrowing cost                    10

The QSD or Quality Spread Differential = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) =0.5%.

Now the swap bank Quote difference =  10.7% - 10.8% = 0.1%

Hene Net savings to both Alpha & Beta = 0.5%-0.1% = 0.40%

Net savings to Alpha = 0.40% /2 = 0.20%

Net savings to Beta = 0.40% /2 = 0.20%

Alpha will issue fixed-rate debt at 10.5% and Beta will issue floating rate-debt at LIBOR + 1%

Alpha will receive 10.7% from the swap bank and pay it LIBOR. If this is done, Alpha’s floating-rate all-in-cost is= 10.5% + LIBOR - 10.7% = LIBOR -0.20%.

Previously Alpha could borrow at LIBOR. Now Alpha could borrow at net cost LIBOR -0.20%.Hence there is 0.20% savings due to Swap.

Beta will pay 10.8% to the swap bank and receive from it LIBOR. if this is done, Beta’s fixed-rate all in-cost is= LIBOR+ 1% + 10.8% - LIBOR = 11.8%

Previously Beta could borrow at 12.0% fixed rate. Now Beta could borrow at net cost 11.80%.Hence there is 0.20% savings due to Swap.