IBM and AT&T decide to swap $1 million loans.IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan.What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?
A) -$50,000
B) $50,000
C) -$90,000
D) 0

Question

Quizplus · Accepted Answer

If LIBOR rises to 8.5%, AT&T's rate becomes 9.0% (8.5% + 0.5%). IBM, now paying this rate, has a cash flow equivalent to its original fixed rate of 9.0%, resulting in no net cash flow difference.

IBM and AT&T Decide to Swap $1 Million Loans