Dog's Can Borrow Money at Either a Fixed Rate of 8.25

question 64

Multiple Choice

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus .5 percent. Cat's can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a variable rate. Given this information, which one of the following statements is correct?

• A) After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent.
• B) Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's.
• C) Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus .75 percent variable rate.
• D) Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's.
• E) Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.

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Definitions:

Perfectly Competitive

Describes a market structure where many firms sell identical products, there are no barriers to entry, and no single buyer or seller can influence the market price.

Allocate Resources

The process of distributing available resources, such as labor, capital, and land, among various uses to fulfill societal needs and wants.

Consumer Surplus

The deviation between the monetary amount consumers are willing to pay for a good or service and the monetary amount they actually pay.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay and the actual price they do pay.