Company a Can Issue Floating-Rate Debt at LIBOR + 1

question 2

Multiple Choice

Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%.Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%.Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A.What are the resulting net payments of A and B?

• A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
• B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
• C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
• D) A pays a fixed rate of 7.95%, B pays LIBOR.
• E) None of the above answers is correct.

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