When a Company Can Borrow at a Fixed Rate of 8

question 26

True/False

When a company can borrow at a fixed rate of 8% per annum and a variable rate of LIBOR + 0.60% per annum and another company can borrow at a fixed rate of 9% per annum and a variable rate of LIBOR + 0.80 a profitable vanilla swap can be arranged between them so that both their borrowing obligations can be lowered.

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Definitions:

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other assets at a specified price within a specific time frame.

Strike Price

The set price at which an option contract can be bought (call) or sold (put) when it is exercised.

Market Price

The current price at which an asset or service can be bought or sold in a marketplace.

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period.