Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR
+ 1)5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?
A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
D) A pays a fixed rate of 7.95%, B pays LIBOR.
E) None of the above answers is correct.

Question

Quizplus · Accepted Answer

Company A's net payment is 9% (fixed rate debt) - 7.95% (received from B) = 1.05% + LIBOR = 8.95%. Company B's net payment is LIBOR + 1.5% (floating rate debt) - LIBOR (received from A) + 7.95% = 1.5% + 7.95% = 9.45%. However, the closest option is B, which states B pays LIBOR + 1.45%, indicating a slight discrepancy in the problem setup or options.

Company a Can Issue Floating-Rate Debt at LIBOR + 1