Company X,a Low-Rated Firm,desires a Fixed-Rate,long-Term Loan

question 24

Multiple Choice

Company X,a low-rated firm,desires a fixed-rate,long-term loan.X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR.Its direct borrowing cost is 11% in the fixed-rate bond market.In contrast,company Y,which prefers a floating-rate loan,has access to fixed-rate funds in the Eurodollar bond market at 9% and floating-rate funds at LIBOR + 1/4%.Suppose they split the cost savings.
-How much would Y pay for its floating-rate funds?

• A)LIBOR -.25%
• B)LIBOR -.50%
• C)LIBOR
• D)LIBOR + .5%

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