The Smith Co. can borrow money at a fixed rate of 9.25% or a variable rate set at prime plus 1.5% The Tanner Co. can borrow money at a variable rate of prime plus 1% or a fixed rate of 9% The Smith Co. prefers a fixed rate and the Tanner Co. prefers a variable rate. Given this information, which one of the following statements is correct?
A) After swapping interest rates with the Tanner Co., the Smith Co. will end up paying about 1.25% over prime on their borrowed funds.
B) Both companies can profit in a swap which will allow the Smith Co. to pay between 9 and 9.25% as a fixed rate.
C) The Tanner Co. will end up with a fixed rate of 9.25%
D) The Tanner Co. has the best chance of profiting if they do an interest rate swap with the Smith Co.
E) There are no terms under which the Smith Co. and the Tanner Co. can swap interest rates and each realizes a profit.

Question

Quizplus · Accepted Answer

The Answer of The Smith Co. can borrow money at a fixed rate of 9.25% or a variable rate set at prime plus 1.5% The Tanner Co. can borrow money at a variable rate of prime plus 1% or a fixed rate of 9% The Smith Co. prefers a fixed rate and the Tanner Co. prefers a variable rate. Given this information, which one of the following statements is correct?
A) After swapping interest rates with the Tanner Co., the Smith Co. will end up paying about 1.25% over prime on their borrowed funds.
B) Both companies can profit in a swap which will allow the Smith Co. to pay between 9 and 9.25% as a fixed rate.
C) The Tanner Co. will end up with a fixed rate of 9.25%
D) The Tanner Co. has the best chance of profiting if they do an interest rate swap with the Smith Co.
E) There are no terms under which the Smith Co. and the Tanner Co. can swap interest rates and each realizes a profit.