Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below: Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR – 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X?
A.
Company X will lose money on the deal
B.
Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
C.
Company X will only break even on the deal
D.
Company X will save 5 basis points per year on $10,000,000 = $5,000 per year