A Firm Can Borrow at a Floating Rate of LIBOR

question 48

Multiple Choice

A firm can borrow at a floating rate of LIBOR + 2.5% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 1.25% and pays a fixed rate of 3.75%,what is the rate of interest on its borrowing?

• A)5.00%
• B)3.75%
• C)7.50%
• D)2.50%
• E)1.25%

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Definitions:

Corporate Board

A body of persons chosen by stockholders to supervise and make key decisions for a company's management.

Policy

A deliberate system of principles to guide decisions and achieve rational outcomes, often enacted by an organization or government.

Dividends

Profits distributed by a company to its shareholders, usually derived from the company's earnings.

Market Price

The present cost at which a service or asset is available for purchase or sale in the market.