Murray\'s can borrow money at a fixed rate of 10.5 percent or a variable rate se

Question

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed rate. The swap dealer will take a 1.5 percent profit. Specify what rate each party will pay and receive from the dealer and how the dealer will lock in their profit.   

Murray:

Pay

Receive

Savings

Fred:

Pay

Receive

Savings Dealer:

Pay to Murray

Receive From Murray

Profit Pay to Fred

Receive from Fred

Profit

Explanation / Answer

Ans =After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent

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