A Company Is Concerned That the Cost of Its Long-Term

question 46

Multiple Choice

A company is concerned that the cost of its long-term debt facilities is based on a fixed interest rate that is considerably above current market rates,and that rates will continue to fall.The company decides to use a swap to manage its risk exposure.using the data provided below,which of the following statements is incorrect?
Data:
Existing debt fixed interest rate:
13.50% per annum
Current long-term fixed swap rate:
11.75% per annum
Current long-term floating swap rate:
BBSW+0.50% per annum

• A) The company has created a synthetic fixed rate liability.
• B) Short-term interest rates are expected to remain below the existing fixed cost of debt.
• C) The effective cost of borrowing is lower, as long as BBSW averages less than 11.25% per annum.
• D) This strategy assumes a 'normal' yield curve, on average, over the life of the swap.

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