A Firm Can Borrow at a Floating Rate of LIBOR

question 1

Multiple Choice

A firm can borrow at a floating rate of LIBOR + 1% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 2% and pays a fixed rate of 3%,what is the rate of interest on its borrowing?

• A)5%
• B)4%
• C)6%
• D)2%
• E)3%

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Definitions:

Net Income

The profit a company generates after all expenses, taxes, and costs have been deducted from total revenue.

Common Stock

Equity ownership in a corporation, with voting rights and potential dividends, but last in priority for assets and income.

Cash Dividends

Distributions of a corporation's earnings to shareholders as a return on their investment, typically in the form of cash.

Asset Balances

The values of all the assets that a company has listed on its balance sheet, these values are assessed at the end of a reporting period.