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.

Question

Quizplus · Accepted Answer

A's original cost is LIBOR + 1%. After the swap, A pays 7.95% fixed to B and receives LIBOR from B, effectively paying 7.95% fixed. B's original cost is 9.4% fixed. After the swap, B pays LIBOR to A and receives 7.95% fixed from A, effectively paying 9.4% - 7.95% = 1.45% over LIBOR, or LIBOR + 1.45%.

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