Good Company Prefers Variable to Fixed Rate Debt Given This Information:
A) an Interest Rate Swap Will Probably

question 53

Multiple Choice

Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable rate debt. Assume the following information for Good and Bad Companies:
$$\begin{array} { l c c }&\underline{ \text { Fixad Fata Gond } }& \underline{\text { Variable Fite Bond }} \\ \text { Gaod Campany } &10\%&\text { LIBOR } + 1 \% \\\text { Bad Campany } & 12 \% &\text { LIBOR } + 1.5 \%\\ \\\end{array}$$
Given this information:

• A) an interest rate swap will probably not be advantageous to Good Company because it can issue both fixed and variable debt at more attractive rates than Bad Company.
• B) an interest rate swap attractive to both parties could result if Good Company agreed to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
• C) an interest rate swap attractive to both parties could result if Bad Company agreed to provide Good Company with variable rate payments at LIBOR + 1% in exchange for fixed rate payments of 10.5%.
• D) none of the above

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