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BF Goodrich Fixed
12.50%
Rabobank Floating
L + 0.25%
Total Cost
L + 12.75%
*BF Goodrich should borrow floating and Rabobank should borrow fixed
BF Goodrich Floating
Rabobank Fixed (Semi-Annual)
Total Cost
L + 0.5%
10.7%
L + 11.2%
(1+r/2)^2 = (1+x)
solve for r
Terms: Rabobank
Credit Rating:
AAA
Amount
$50
Maturity:
8 Yrs
Coupons:
Annual
Coupon Rate:
Fixed at 11%, semiannual equivalent YTM = 10.7%
Alt Cost of 8 Yr Float Rate Debt: L + 0.25% - L + 0.375%
<
L-x
<
<
Morgan
>>>>>>>>>>>
10.7+f+0.06
|
|
| L+0.5 to Bondholders
Rabobank
>>>>>>>>>>>>>>
10.70%
|
|
| 10.7% Fixed to Bondholders
Outside Floating Cost: L +0.25%
Rabobank:
Pay 11% coupon payments annually on Eurobond debt (10.7% semiannual equivalent YTM)
Pay Morgan semiannual payments of L - x
Receive $5.5M annually to cover its coupon payment obligations
Cost to BF Goodrich:
CF to Bondholders:
CF to Morgan:
CF from Morgan:
Cost to Rabobank:
CF to Bondholders:
CF to Morgan:
CF from Morgan:
-(L + 0.5%)
-10.7% - f - 0.06%
+(L-x)
-10.7%
-(L-x)
+10.7%
CF to Morgan:
CF from BF:
CF from Rabo:
0.38%
0.25%
Savings to BF Goodrich:
Savings to Rabobank:
Profit to Morgan:
Total Savings
0.61%
0.50%
0.43%
1.55%