Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap.Each can borrow at the following rates: An interest rate swap would be beneficial to both parties if:
A)the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate.
B)the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate.
C)both firms want to borrow at the variable rate.
D)both firms want to borrow at the fixed rate.
E)an interest rate swap would be never be beneficial in this situation.

Question

Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap.Each can borrow at the following rates:  An interest rate swap would be beneficial to both parties if:
A)the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. 
B)the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. 
C)both firms want to borrow at the variable rate. 
D)both firms want to borrow at the fixed rate. 
E)an interest rate swap would be never be beneficial in this situation.

Quizplus · Accepted Answer

An interest rate swap would be beneficial if the high credit risk (HCR) firm wants to borrow at the fixed rate and the low credit risk (LCR) firm wants to borrow at the variable rate. This is because the HCR firm may have difficulty obtaining a variable rate loan due to its perceived credit risk, and the LCR firm may prefer the flexibility and potential cost savings of a variable rate loan. By entering into an interest rate swap, the HCR firm is able to obtain a variable rate loan through the LCR firm, while the LCR firm obtains a fixed rate loan from the HCR firm. This can result in cost savings for both firms.

Assume That Two Firms, One Considered a High Credit Risk