Firm a Can Borrow at 4% Fixed or at Libor

question 32

Multiple Choice

Firm A can borrow at 4% fixed or at Libor flat in the fixed and floating rate markets, respectively. Firm B can borrow at 7% fixed or Libor plus 100 bps in the fixed and floating rate markets, respectively. A wants to borrow floating and B wants to borrow fixed. If A borrows fixed and B borrows floating and they enter into a fixed-for-Libor interest-rate swap in which A pays Libor flat, what is the range of fixed rates for B that enables each firm to improve its financing costs (compared to accessing financing in the market directly) ?

• A) 4%-7%
• B) 4%-6%
• C) 5%-6%
• D) 5%-7%

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Definitions:

Anaerobic Respiration

Anaerobic respiration is a process by which cells produce energy without the need for oxygen, through fermentation or other means.

Aerobic Respiration

The process of producing cellular energy involving oxygen.

ATP

Adenosine triphosphate, a molecule that provides energy to drive many processes in living cells, acting as a universal energy currency.

Tropomyosin

A regulatory protein in muscle cells that blocks the binding site for myosin on actin molecules, preventing muscle contraction in the absence of calcium.