A Firm Can Borrow at Fixed AA Rates Plus 1

question 37

Multiple Choice

A firm can borrow at fixed AA rates plus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

• A)r + 1%
• B)r - 1%
• C)r%
• D)1%
• E)2%

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Definitions:

Excess Demand

A situation in a market where the quantity demanded of a good or service exceeds the quantity supplied at the current price.

Price Floor

A government or regulatory minimum price set above the equilibrium price, preventing the market price from falling below it.

Equilibrium Price

The market price at which the quantity of a good or service supplied is equal to the quantity demanded.

Maximum Price

A price ceiling set by a governing body, above which a particular good or service cannot legally be sold.