Johnson Industries is currently paying a variable rate loan and desires greater certainty with regard to their loan payments. Refinancing is currently not available so they decide to pursue an interest rate swap agreement. Which of the following will help Johnson stabilize their anticipated cash outflows? Enter into an agreement to:
A)Receive LIBOR and pay a quoted rate.
B)Receive a quoted rate and pay LIBOR + 1.50%.
C)Receive LIBOR and pay LIBOR + 1.50%.
D)None of the above will help Johnson Industries pay a fixed amount for their obligations.

Question

Quizplus · Accepted Answer

By entering into an agreement to receive LIBOR and pay a quoted rate, Johnson Industries effectively converts their variable rate loan into a fixed rate loan, thus stabilizing their cash outflows.

Johnson Industries Is Currently Paying a Variable Rate Loan and Desires