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:

Common Share

A unit of equity ownership in a corporation, granting holders voting rights and a share in the profits through dividends.

Noncumulative

A term often used in the context of preferred stock dividends that indicates dividends not paid in one period do not need to be paid in future periods.

Nonparticipating

Refers to an insurance policy, financial instrument, or other contracts that do not entitle the holder to share in the profits or surplus of the issuer.

Cash Dividends

Payments made by a corporation to its shareholders out of its profits or reserves in the form of cash.