Axil Corp.has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower,which it can be at LIBOR + 1%.Bevel Corp.strongly prefers fixed-rate DM debt,but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry.Bevel,however,can obtain Eurodollars at LIBOR + ½%.
-What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?
A)1%
B)75%
C)2%
D)1.25%

Question

Quizplus · Accepted Answer

Axil Corp. wants to avoid the Deutsche mark and only wishes to be a floating-rate dollar borrower. On the other hand, Bevel Corp. strongly prefers fixed-rate DM debt. Bevel can obtain Eurodollars at LIBOR + ½%, which means the fixed rate for DM debt must be at least 2% higher than the floating rate for USD debt for them to prefer DM debt. A currency swap could benefit both companies as Axil could benefit from the higher fixed-rate DM debt and Bevel could benefit from the lower floating-rate USD debt. The maximum possible cost savings for Axil would be 2%, which is the difference between the 6 1/4% coupon rate for DM debt and the 1% LIBOR rate for USD debt.

Axil CorpHas Not Tapped the Deutsche Mark Public Debt Market Because