Answer: 1.0%

## Explanation To calculate the total potential savings from an interest rate swap using comparative advantage: ### Step 1: Identify the absolute advantage - **Company C** has lower rates in both markets: - Fixed: 10% vs 12% (2% advantage) - Floating: LIBOR+50bps vs LIBOR+100bps (50bps advantage) ### Step 2: Identify the comparative advantage - **Company C** has a greater advantage in fixed rate borrowing: 2% vs 0.5% - **Company D** has a smaller disadvantage in floating rate borrowing: 1% vs 2% ### Step 3: Calculate total potential savings - **Quality spread differential (QSD)** = (Fixed rate difference) - (Floating rate difference) - QSD = (12% - 10%) - [(LIBOR+100bps) - (LIBOR+50bps)] - QSD = 2% - 0.5% = 1.5% However, the **total potential savings** is the **quality spread differential**, which is **1.5%**. ### Step 4: Verify the correct answer Looking at the options: - A. 0.5% - This is only the floating rate difference - B. 1.0% - This would be incorrect - **C. 1.5% - CORRECT** - D. 2.0% - This is only the fixed rate difference Therefore, the total potential savings for C and D if they enter into an interest rate swap is **1.5%**.

Author: LeetQuiz .