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28. Your firm can borrow at a fixed rate of 8% or a floating of LIBOR+1%....

28. Your firm can borrow at a fixed rate of 8% or a floating of LIBOR+1%. You can also enter into a fixed-for-LIBOR swap where the fixed rate (R%) is 7.7% in the exchange of LIBOR. Suppose that you borrow at a fixed rate of 8% and then enter into the swap. What is the net effect of the swap?

  1. You can convert the fixed rate to a floating rate of LIBOR+0.3%
  2. You can convert the fixed rate to a floating rate of LIBOR+0.5%
  3. You can convert the floating rate to a fixed rate of 7.5%
  4. You can convert the floating rate to a fixed rate of 8.5%
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Answer #1

Correct Answer is OPTION A

NOTE : Thus firm will be able to borrow at LIBOR + 0.3% by entering into a swap, as compared to LIBOR + 1% that it could have borrowed directly

therefore by entering into the swap firm has saved 0.7%

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