Good Company Prefers Variable to Fixed Rate Debt

question 50

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: 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:

Taste Receptors

Specialized sensory cells located on the tongue that enable the perception of taste, including sweet, sour, bitter, salty, and umami.

Papillae

Small bumps found on the surface of the tongue, containing taste buds that allow for the sensation of taste.

Illusion

A perception that misleadingly represents reality, leading to misinterpretation of true sensory information.

Semicircular Canals

Three fluid-filled tubes in the inner ear that play a key role in maintaining balance by detecting rotational movements.