A Firm Can Borrow at a Fixed Rate of 7

question 35

Multiple Choice

A firm can borrow at a fixed rate of 7.25% on long-term loans.If it swaps its long-term payments so that it receives 6.5% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

• A)LIBOR + 7.25%
• B)LIBOR + 6.5%
• C)LIBOR - 0.75%
• D)LIBOR
• E)LIBOR + 0.75%

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Definitions:

Liquidated Damages

A bona fide estimate of the monetary damages that would flow from the breach of a contract.

Consequential Damages

Indirect damages that do not flow directly from the act but occur as a consequence of the initial act, often involving loss of profit or other secondary losses.

Liquidated Damages

A pre-determined sum agreed upon by parties in a contract as compensation for breach of contract, where actual damages are difficult to ascertain.