Assume that two firms,one considered a high credit risk (HCR)and the other a low credit risk (LCR),are considering an interest rate swap.Each can borrow at the following rates: $\begin{array}{llcc}
\quad\quad\text { Fixed Rate } & \quad\text { Variable Rate } \
\text { LCR } &8\%&5\%\
\text { HCR } &12\%&7\%\
\end{array}$

An interest rate swap would be beneficial to both parties if:

Question

Assume that two firms,one considered a high credit risk (HCR)and the other a low credit risk (LCR),are considering an interest rate swap.Each can borrow at the following rates: $\begin{array}{llcc}
  \quad\quad\text { Fixed Rate } & \quad\text {  Variable Rate }  \
 \text { LCR } &8\%&5\%\
 \text {  HCR } &12\%&7\%\
\end{array}$

An interest rate swap would be beneficial to both parties if:

Quizplus · Accepted Answer

An interest rate swap would be beneficial to both parties if the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. In this case, the HCR firm can borrow at a lower rate by borrowing at the variable rate, while the LCR firm can borrow at a lower rate by borrowing at the fixed rate. By swapping their respective interest rates, both firms can reduce their borrowing costs and achieve their preferred borrowing terms.

Assume That Two Firms,one Considered a High Credit Risk (HCR)and