A Firm Can Borrow at Fixed AA Rates for Long-Term

question 22

Multiple Choice

A firm can borrow at fixed AA rates for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r% and the fixed rate is 1%?

• A)r + 1%
• B)r - 1%
• C)r%
• D)1%
• E)2%

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Definitions:

Savings and Loan Debacle

A financial crisis in the United States during the 1980s and 1990s involving the failure of savings and loan associations, largely due to risky business practices.

Checkable Deposits

Consist of money in bank accounts that can be drawn upon by writing a check or using a debit card, offering immediate liquidity.

Savings and Loans

Financial institutions that specialize in accepting savings deposits and making mortgage and other loans.

Credit Card Companies

Financial institutions that issue credit cards to consumers, facilitating electronic payment transactions and extending credit.