A Firm Can Borrow at a Floating Rate of LIBOR

question 90

Multiple Choice

A firm can borrow at a floating rate of LIBOR + 2.5% on short-term loans.It swaps its short-term payments so that it receives LIBOR + 1.25% and pays a fixed rate of 3.75%.If the notional principal is $100 million,what is the amount the firm pays under the swap?

• A)$1.25 million
• B)$2.5 million
• C)$3.75 million
• D)$5 million
• E)$7.5 million

---

Definitions:

Bank Runs

The rapid withdrawal of deposits by customers from a bank or financial institution due to fears of insolvency.

U.S. Banking System

The U.S. Banking System refers to the structure and institutions involved in providing financial services, including savings accounts, loans, and other fiscal transactions, within the United States.

Money Supply

The total amount of money available in an economy at a specific time, including cash, deposits, and other liquid assets.

Medium of Exchange

is an intermediary instrument used to facilitate the sale, purchase, or trade of goods and services between parties.