A Firm Can Borrow at a Floating Rate of LIBOR

question 94

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 + 1.5% and pays a fixed rate of 5%,what is the rate of interest on its borrowing?

• A)4.5%
• B)2.5%
• C)5.0%
• D)5.5%
• E)7.5%

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Definitions:

SMEs

Small and Medium-sized Enterprises, which are businesses with personnel numbers or financial turnover falling below certain predefined limits.

IFRS

International Financial Reporting Standards, which are a set of accounting standards developed by the International Accounting Standards Board (IASB).

Amortized

In finance, to amortize a debt means to reduce or extinguish it by making regular payments over a period of time, effectively decreasing the principal amount along with interest.

Goodwill

An intangible asset that arises when a buyer acquires an existing business, representing the premium paid over the fair market value of the net identifiable assets of the business.