Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus .5 percent or a fixed rate of 8 percent. Company A prefers a variable rate and Company B prefers a fixed rate. Which one of the following statements depicts the most favorable outcome of a swap between Companies A and B?
A) Company A could pay a fixed rate of 7.25 percent.
B) Company A could pay a fixed rate of 7.75 percent.
C) Company B could pay a fixed rate of 8 percent.
D) Company B could pay the variable prime rate + 1 percent.
E) Company A could pay the variable prime rate + .75 percent.

Question

Quizplus · Accepted Answer

Company A prefers a variable rate and can borrow at prime + 1%. Company B prefers a fixed rate and can borrow at 8%. A swap could allow Company A to pay a lower variable rate of prime + 0.75%, benefiting both parties by reducing their borrowing costs.

Company a Can Borrow Money at a Fixed Rate of 7.5