What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?
A)LIBOR 0.5
B)LIBOR
C)LIBOR + 0.5
D)An interest swap is always beneficial for both parties involved

Question

What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?
A)LIBOR 0.5 
B)LIBOR 
C)LIBOR + 0.5 
D)An interest swap is always beneficial for both parties involved

Quizplus · Accepted Answer

If company A is currently benefitting from the interest rate swap, it must be paying a rate lower than the fixed rate it has agreed to pay in the swap. Therefore, in order to make the swap no longer beneficial, the rate it pays on its floating rate debt must increase by the same amount as the fixed rate in the swap. Choice C, LIBOR + 0.5, represents an increase of 0.5 from the base LIBOR rate, which could make the interest rate swap no longer beneficial for both parties involved.

What Rate Would Company a Have to Pay on Its