Firm a Can Borrow at 4% Fixed or at Libor

question 21

Multiple Choice

Firm A can borrow at 4% fixed or at Libor flat in the fixed and floating rate markets,respectively.Firm B can borrow at 7% fixed or Libor plus 100 bps in the fixed and floating rate markets,respectively.A wants to borrow floating and B wants to borrow fixed. If A borrows fixed and B borrows floating and they enter into a fixed-for-Libor interest-rate swap in which A pays Libor flat,what is the range of fixed rates for B that enables each firm to improve its financing costs (compared to accessing financing in the market directly) ?

• A)4%-7%
• B)4%-6%
• C)5%-6%
• D)5%-7%

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Definitions:

Collectivities

Groups or entities that individuals belong to, which have collective goals, interests, or identities.

Interacting People

The process by which individuals communicate, influence, and relate to one another within a society.

Decentralizing Decision-making

involves distributing authority for decision-making from a central figure or location to individuals or units at various levels within an organization or system.

Flattening Structures

The process of reducing levels of hierarchy within an organization or system, leading to a more horizontal organizational structure.