ASO can borrow money at either a fixed rate of 7.5% or a variable rate set at prime plus 0.5% DOT can borrow money at either a variable rate of prime plus 1% or a fixed rate of 7.25% ASO prefers a fixed rate and DOT prefers a variable rate. Given this information, which one of the following statements is correct?
A) After a swap with ASO, DOT should end up paying a fixed rate of about 7.125%
B) DOT should end up paying the prime rate if they do an interest rate swap with ASO.
C) Both firms will profit if they swap a 7.35% fixed rate for a prime plus 0.75% variable rate.
D) ASO will end up paying no more than 7% as a fixed rate after a swap with DOT.
E) ASO and DOT cannot swap interest rates in a manner that will be profitable for both firms.

Question

Quizplus · Accepted Answer

Both firms will profit if they swap a 7.35% fixed rate for a prime plus 0.75% variable rate because ASO prefers a fixed rate and DOT prefers a variable rate, and this swap provides a middle ground that benefits both parties.

ASO Can Borrow Money at Either a Fixed Rate of 7.5