Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%.Sahali Trading Company then enters into an interest rate swap where they will pay LIBOR and receive a fixed 8.00% on a notional principal of $100 million.After all these transactions are considered,Sahali's cost of funds is __________.

Question

Quizplus · Accepted Answer

By entering into the interest rate swap, Sahali Trading Company effectively converts its fixed rate debt into floating rate debt. The company now pays LIBOR (which is currently around 3%) and receives a fixed rate of 8%. The net result is that the company's cost of funds is the sum of the two rates, which equals 11%. Therefore, answer C (LIBOR + 1%) is the correct option.

Sahali Trading Company Has Issued $100 Million Worth of Long-Term