A Firm with a Variable-Rate Loan Wants to Protect Itself

question 58

Multiple Choice

A firm with a variable-rate loan wants to protect itself from increases in interest rates.Which of the following would interest this firm?
I.interest rate floor
II.interest rate cap
III.put option on an interest rate
IV.call option on an interest rate

• A)I only
• B)I and III only
• C)I and IV only
• D)II and III only
• E)II and IV only

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Definitions:

Break-even Point

The juncture where the sum of all expenses matches the sum of all income, leading to neither a profit nor a deficit.

Variable Expense

Expenses that vary directly with the amount of production or the degree of operational activity.

Contribution Margin Ratio

The percentage of each sale that exceeds the variable costs of production.

Break-even Point

The level of production or sales at which total revenues equal total expenses, resulting in neither profit nor loss.