A firm agrees to accept payments on a $1 000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit

Question

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The firm will benefit if LIBOR rises because it has a fixed interest rate obligation and receives payments based on the LIBOR rate. If LIBOR increases, the payments it receives (based on the floating rate) will be higher, while its own payment obligations remain constant due to the fixed rate.

A Firm Agrees to Accept Payments on a $1 000,000