FINANCIAL ANALYSIS

Quality Spread Differentials

Quality Spread Differentials

Introduction

Quality Spread Differential (QSD) is a concept in which two parties having different level of market standings (i.e. worth) can experience different levels of interest rate, is termed as QSD. There are conditions of a swap i.e. A swap can be positive or it may be negative. When the swap is 'positive', it is beneficial for both the contracting parties and vice versa.

Question

Calculate the quality spread differential (QSD).

The QSD = (9% - 11%) minus (LIBOR + 1% - LIBOR) = - 3%

Question (Part B)

Company C has to initiate for an issuance of a fixed rate debt at 9% while on the other hand, Company D needs to initiate for the issuance of a floating rate debt of LIBOR + 1%. Company A needs to make a payment to Company D. Therefore, company C needs to pay 9. 25% to the company D. if it is done in the same way the floating rate cost of Company C is : 9% + LIBOR - 9.25% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own. The fixed rate for the company D is: LIBOR+ 1% + 9.25% - LIBOR = 10.25%, a .25% savings on the issue of a fixed debt rate.

Question (Part B)

Company C initiates to issue a debt on the fixed rate of 9% while on the other hand, Company D needs to initiate for the issuance of a floating rate debt of LIBOR + 1%. Beta will pay 9.2% to the swap bank and receive from it LIBOR. If it is done in the same way the floating rate cost of Company C is: 9% + LIBOR - 9.2% = LIBOR - .20%, a .20% savings over issuing floating-rate debt on its own. The fixed rate ...