Layton Enterprises and Hewitt Ltd agree to swap their loans. The terms of the loans are:

Under the swap agreement Layton will make floating rate payments to Hewitt Ltd at the bank bill rate plus 0.8 per cent and Hewitt will make fixed rate payments to Layton Enterprises at 12 per cent.
Layton Enterprises' alternative to the fixed interest loan was to pay the bank bill rate (a floating rate). Hewitt's alternative was to pay a fixed interest rate of 13.5 per cent.
Is each company better off under the swap agreement than if it had taken up the alternatives offered by the bank? What is the net difference in the interest rate paid under the swap and the alternative for each company?
A. Layton Enterprises is better off but Hewitt Ltd may not be. Layton pays 2 per cent less but Hewitt Ltd's position will depend on the level of the bank bill rate in each period.
B. Each company is better off. Layton Enterprises pays 1.2 per cent less and Hewitt Ltd pays 1.5 per cent less.
C. Hewitt Ltd is better off but Layton Enterprises may not be. Hewitt Ltd pays 0.2 per cent less and Layton Enterprises' position will depend on the level of the bank bill rate in each period.
D. Each company's position will depend on the level of bank bill rate in each period. In entering the agreement they are anticipating that it will not go over 13.5 per cent.
E. None of the given answers.

Question

Layton Enterprises and Hewitt Ltd agree to swap their loans. The terms of the loans are:
  
Under the swap agreement Layton will make floating rate payments to Hewitt Ltd at the bank bill rate plus 0.8 per cent and Hewitt will make fixed rate payments to Layton Enterprises at 12 per cent.
Layton Enterprises' alternative to the fixed interest loan was to pay the bank bill rate (a floating rate). Hewitt's alternative was to pay a fixed interest rate of 13.5 per cent.
Is each company better off under the swap agreement than if it had taken up the alternatives offered by the bank? What is the net difference in the interest rate paid under the swap and the alternative for each company? 
A. Layton Enterprises is better off but Hewitt Ltd may not be. Layton pays 2 per cent less but Hewitt Ltd's position will depend on the level of the bank bill rate in each period.
B. Each company is better off. Layton Enterprises pays 1.2 per cent less and Hewitt Ltd pays 1.5 per cent less.
C. Hewitt Ltd is better off but Layton Enterprises may not be. Hewitt Ltd pays 0.2 per cent less and Layton Enterprises' position will depend on the level of the bank bill rate in each period.
D. Each company's position will depend on the level of bank bill rate in each period. In entering the agreement they are anticipating that it will not go over 13.5 per cent.
E. None of the given answers.

Quizplus · Accepted Answer

The Answer of Layton Enterprises and Hewitt Ltd agree to swap their loans. The terms of the loans are:
  
Under the swap agreement Layton will make floating rate payments to Hewitt Ltd at the bank bill rate plus 0.8 per cent and Hewitt will make fixed rate payments to Layton Enterprises at 12 per cent.
Layton Enterprises' alternative to the fixed interest loan was to pay the bank bill rate (a floating rate). Hewitt's alternative was to pay a fixed interest rate of 13.5 per cent.
Is each company better off under the swap agreement than if it had taken up the alternatives offered by the bank? What is the net difference in the interest rate paid under the swap and the alternative for each company? 
A. Layton Enterprises is better off but Hewitt Ltd may not be. Layton pays 2 per cent less but Hewitt Ltd's position will depend on the level of the bank bill rate in each period.
B. Each company is better off. Layton Enterprises pays 1.2 per cent less and Hewitt Ltd pays 1.5 per cent less.
C. Hewitt Ltd is better off but Layton Enterprises may not be. Hewitt Ltd pays 0.2 per cent less and Layton Enterprises' position will depend on the level of the bank bill rate in each period.
D. Each company's position will depend on the level of bank bill rate in each period. In entering the agreement they are anticipating that it will not go over 13.5 per cent.
E. None of the given answers.

Layton Enterprises and Hewitt Ltd Agree to Swap Their Loans