Two companies would like to borrow money. Company A is offered a fixed rate of 4% and afloating rate of the BA rate (= the current yield on Bankers' Acceptances) + 0.4%. Company B isoffered a fixed rate of 6% and a floating rate of the BA rate + 1.4%. Given this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

Company B has a comparative advantage in the floating rate market because it is offered a lower increase (BA rate + 1.4%) compared to Company A (BA rate + 0.4%) while being offered a higher fixed rate (6%) compared to Company A (4%). This means that Company B has a lower overall cost of borrowing in the floating rate market compared to Company A.

Two Companies Would Like to Borrow Money