Company X Wants to Borrow $10,000,000 Floating for 5 Years

question 29

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years.Company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are: $$\begin{array} { l l l } & \text { Fixed-Rate Borrowing } & \text { Floating-Rate } \\& \text { Cost } & \text { Borrowing Cost } \\\hline \text { Company X } & 10 \% & \text { LIBOR } \\\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for A = Company X's external borrowing rate
B = Company Y's payment to X (rate)
C = Company X's payment to Y (rate)
D = Company Y's external borrowing rate

• A)A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5%
• B)A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5%
• C)A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12%
• D)A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12%

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Definitions:

Welcoming

Welcoming refers to creating an inclusive and friendly atmosphere that makes others feel accepted and valued.

Moral Worth

The inherent value of an action or person, based on ethics and morality.

Courage

The ability to overcome fear and live (or die) by one’s convictions, even in ambiguous, uncertain, and dangerous situations; the virtue that underlies and gives reality to all other values; the basis for moral worth and dignity.

Dignity

The inherent worth and respect that every individual deserves, regardless of their status, achievements, or abilities.