Prepare a fully labelled diagram to show the construction and cash flows of the direct interest rate swap.

Posted: January 10th, 2022

Prepare a fully labelled diagram to show the construction and cash flows of the direct interest rate swap. In your diagram, show which firm will initially borrow fixed-rate debt and which firm will borrow variable-rate debt. (Note that the comparative advantage net differential is to be shared equally between the companies.) (LO 21.1)