Company a Can Issue Floating-Rate Debt at LIBOR + 1

question 1

Multiple Choice

Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR
+ 1) 5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

• A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
• B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
• C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
• D) A pays a fixed rate of 7.95%, B pays LIBOR.
• E) None of the above answers is correct.

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Definitions:

Compound

A chemical substance made up of two or more different elements that are chemically bonded together in a fixed ratio.

Dimethylheptanoic Acid

denotes a hypothetical organic compound, potentially misnamed, suggesting a heptanoic acid derivative substituted with two methyl groups.

γ-hydroxypentanoic Acid

An organic compound characterized by a five-carbon chain with a hydroxyl group attached to the third carbon and a carboxylic acid group at the end.

γ-hydroxy-γ-methylbutyric Acid

An organic compound, structurally related to β-hydroxy-β-methylbutyrate (HMB), and is involved in the biosynthesis and metabolism of fatty acids.