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Sir in the answer to eg 2,the benefit of swapping interest rates is a total of 0.5%,which is split into 2 for Co A and Co B,so each company should get adjusted for 0.25% interest ryt?
In the ot answer it has deducted 0.75 from Co A and added 0.75 to Co BYes – so that the end result is that both A and B are paying 0.25% less than they would have been paying if they did not swap.
But in the ot answer,why is it that both are being adjusted for 0.75% and not 0.25?
It is for the reason that I wrote before.
If A does its own borrowing then it would pay L + 1%
They need to save 0.25% and so they need to end up paying L + 0.75%.
Swapping on its own would mean them paying L + 1.5%, and so they need to receive 0.75% from B in order to end up paying L + 0.75%
Similarly, if B does its own borrowing they would pay 11%. They need to save 0.25% and so need to end up paying 10.75%.
Swapping on its own would mean them paying 10%, and so they need to pay 0.75% to A in order to end up paying 10.75%
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