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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Definitions:

Accounting Department

A division within a company that handles financial reporting, bookkeeping, payroll, and other financial-related activities.

External Parties

Individuals or entities outside of a company that have an interest in its activities, such as suppliers, customers, or regulators.

Authority And Responsibility

A management principle stating that a person with authority (power to make decisions) should also be responsible for the outcomes of those decisions.

Performance Evaluation

The process of assessing the performance of employees, processes, or systems against set benchmarks or standards.