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:

Making a Decision

The cognitive process of selecting a course of action from among multiple alternatives, often involving weighing the risks and benefits of different options.

Utility Theory

A theory in economics that attempts to describe how individuals make choices based on the perceived satisfaction or utility from outcomes.

Framing of the Announcement

The way in which an announcement is presented or communicated, which can influence the perception and reaction of the audience.

Decision Making

The cognitive process of selecting a course of action from among multiple alternatives.