Rosie's can borrow money at a fixed rate of 9.4% or a variable rate set at prime plus 1.25% Ed's can borrow money at a variable rate of prime plus 1% or a fixed rate of 8.9% Rosie's prefers a fixed rate and Ed's prefers a variable rate. Given this information, which one of the following statements is correct?
A) After swapping interest rates with the Ed's, Rosie's will end up paying about 1.13% over prime.
B) Both companies can profit in a swap which will allow Rosie's to pay a 9% fixed rate.
C) Ed's will end up with a fixed rate around 9.15%
D) Ed's has the best chance of profiting if they do an interest rate swap with Rosie's.
E) There are no terms under which Rosie's and Ed's can swap interest rates.

Question

Quizplus · Accepted Answer

The Answer of Rosie's can borrow money at a fixed rate of 9.4% or a variable rate set at prime plus 1.25% Ed's can borrow money at a variable rate of prime plus 1% or a fixed rate of 8.9% Rosie's prefers a fixed rate and Ed's prefers a variable rate. Given this information, which one of the following statements is correct?
A) After swapping interest rates with the Ed's, Rosie's will end up paying about 1.13% over prime.
B) Both companies can profit in a swap which will allow Rosie's to pay a 9% fixed rate.
C) Ed's will end up with a fixed rate around 9.15%
D) Ed's has the best chance of profiting if they do an interest rate swap with Rosie's.
E) There are no terms under which Rosie's and Ed's can swap interest rates.

Rosie's Can Borrow Money at a Fixed Rate of 9