AAA Ltd Has Borrowed $15 Million Dollars at a Fixed Rate

question 28

Multiple Choice

AAA Ltd. has borrowed $15 million dollars at a fixed rate of 8% for seven years to purchase large industrial presses. Last year, BBB Ltd. negotiated a variable rate loan, at a similar amount, currently at 7.5%, for somewhat smaller presses with enhanced finishing features. If the two companies enter into an interest rate swap agreement, which of the following best describes the effects?

• A) The remainder of AAA's $15 million is sold to BBB in exchange for an equivalent amount of BBB's $15 million debt.
• B) The fixed assets purchased through the $15 million debt by AAA are exchanged for the fixed assets purchased through debt by BBB. The debt contracts do not change hands and a monetary equivalent for accumulated amortization is provided to BBB.
• C) The fixed assets purchased through the $15 million loan by AAA are exchanged for the fixed assets purchased through debt by BBB. The debt contracts are re-issued to the exchanging parties to reflect the change in hands of assets and financing.
• D) The payments and terms involved in servicing the debt of AAA are assumed by BBB in exchange for AAA taking over the payments and terms involved in servicing BBB's debt. The debt contracts do not formally change hands and are actually serviced by the original borrowers. However, as contracted, an equalization payment is provided to the company with the net lower interest rate for the payment period.
• E) An informal agreement takes place where an electronic funds transfer is established between the banks of AAA and BBB. The fixed terms and repayment schedule of AAA's debt is serviced out of BBB's account, and AAA's account provides the payments subject to the variable rate negotiated by BBB. This arrangement can be terminated by either party.

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Definitions:

Founders

Individuals who establish and begin businesses, organizations, or startups, taking on the risks and responsibilities of creating something new.

Inventory Sale

A transaction involving the sale of products that a company has in stock, typically aimed at reducing excess inventory.

Raw Materials

Basic materials or substances used in the primary production or manufacturing of goods.

Competitors

Other businesses or individuals that offer similar products or services within the same market, often competing for the same customer base.