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Fixed-rate bonds

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Your firm needs to raise $ 100.00 million in funds. You can borrow short term at a spread of 1.0 % over LIBOR.? Alternatively, you can issue 10?-year, ?fixed-rate bonds at a spread of 2.50% over 10?-year? Treasuries, which currently yield 7.60%. Current 10?-year interest rate swaps are quoted at LIBOR versus the 8.0% fixed rate. Management believes that the firm is currently? “underrated” and that its credit rating is likely to improve in the next year or two.? Nevertheless, the managers are not comfortable with the interest rate risk associated with using? short-term debt.a. Suggest a strategy for borrowing the $100.00 million. What is your effective borrowing? rate? b. Suppose the? firm’s credit rating does improve three years later. It can now borrow at a spread of 0.50% over? Treasuries, which now yield 9.10% for a? seven-year maturity. ? Also, seven-year interest rate swaps are quoted at LIBOR versus 9.50%. How would you lock in your new credit quality for the next seven? years? What is your effective borrowing rate? now?

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