Two companies, A and B, are considering entering into a swap agreement. Their borrowing rates are as follows: Floating rate Fixed rate Company A LIBOR 12% Company B LIBOR + 0.3% XXXXXXXXXX% Company A...

Two companies, A and B, are considering entering into a swap agreement. Their borrowing rates are as follows:

Company A needs a floating rate loan of £5m and B needs a fixed rate loan of £5m.

(a) Which company has a comparative advantage in floating rate debt and which company has a comparative advantage in fixed rate debt?

(b) At what rate will Company A be able to obtain floating rate debt and Company B be able to obtain fixed rate debt if the two companies agree a swap and the benefits of the swap are split equally between them? Ignore bank charges.