A Firm Can Borrow at a Floating Rate of LIBOR

question 48

Multiple Choice

A firm can borrow at a floating rate of LIBOR + 2.5% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 1.25% and pays a fixed rate of 3.75%,what is the rate of interest on its borrowing?

• A)5.00%
• B)3.75%
• C)7.50%
• D)2.50%
• E)1.25%

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Definitions:

Tax Advantage

Financial benefits and savings provided through exemptions, deductions, and credits that reduce the amount of tax owed.

Earned Income Credit

A refundable tax credit for low to moderate-income working individuals and families, aimed at decreasing the amount of tax owed and potentially returning money to the taxpayer.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Credit for Child

A tax credit offered to taxpayers for each qualifying child, which can reduce the taxpayer's liability on a dollar-for-dollar basis.