Firm a Is Paying a Fixed $700,000 in Interest Payments

question 42

Multiple Choice

Firm A is paying a fixed $700,000 in interest payments, while Firm B is paying LIBOR plus 50 basis points on $10,000,000 loans. The current LIBOR rate is 6.25%. Firm A and B have agreed to swap interest payments, how much will be paid to which Firm this year?

• A) A pays $750,000 to Firm B
• B) B pays 25,000 to Firm A
• C) B pays $50,000 to Firm A
• D) A pays $25,000 to Firm B

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Definitions:

Capital-Budgeting

The process by which investors or managers evaluate and select long-term investments based on their potential to generate net revenues.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, typically represented by the yield on government bonds.

Risk-Free Rate

The theoretical return on an investment with zero risk, typically represented by the yield on government securities.

Expected Rate

The rate of return that an investor anticipates earning on an investment without taking into account inflation or other factors that could affect the actual yield.