Good Company Prefers Variable to Fixed Rate Debt

question 18

Multiple Choice

Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume that Good and Bad Companies could issue bonds as follows:​

• A)an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
• B)an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1 percent in exchange for fixed rate payments of 10.5 percent.
• C)an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1 percent in exchange for fixed rate payments of 10.5 percent.
• D)none of the above

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Definitions:

Reduction

The action of making something smaller in size, amount, number, or extent.

Implied Employment Contract

An implied employment contract refers to an employment agreement that is not formally documented but is inferred from comments, actions, and the relationship between employer and employee.

Reasonable Expectation

An anticipation or belief that is logically and legally justified under the circumstances.

Substantial Injury

Significant physical, financial, or emotional harm caused to a person or property that may be grounds for legal action.