Question

AAA and BBB both want to borrow $50 million for five years and have been offered...

  1. AAA and BBB both want to borrow $50 million for five years and have been offered the following rates per annum:

Fixed rate

floating rate

AAA

6.5%

LIBOR

BBB

8.0%

LIBOR

Which of the following statements is correct under the comparative advantage argument if they want to transform the interest rates between fixed and floating?

  1. BBB borrows at 6.5% and AAA at 8%, and then they enter into a swap
  2. AAA borrows at 6.5% and BBB at LIBOR, and then they enter into a swap
  3. AAA borrows at LIBOR and BBB at 8.0%, and then they enter into a swap
  4. AAA borrows at LIBOR and BBB at 6.5%, and then they enter into a swap
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