A Firm with Variable-Rate Debt That Expects Interest Rates to Rise

question 16

Multiple Choice

A firm with variable-rate debt that expects interest rates to rise may engage in a swap agreement to:

• A) pay fixed-rate interest and receive floating rate interest.
• B) pay floating rate and receive fixed rate.
• C) pay fixed rate and receive fixed rate.
• D) pay floating rate and receive floating rate.

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Definitions:

Tax Benefit

A reduction in tax liability provided by allowances, deductions, or credits.

Financial Leverage

It refers to the use of borrowed funds by a company to finance its investments, aiming to increase the returns on equity.

M&M Proposition I

A theory in corporate finance stating that in a perfect market, the value of a firm is unaffected by how it is financed, whether through debt or equity.