Question

Press F, a BBB-rated firm, desires a fixed rate, long-term loan. Press F presently has access to floating interest rate funds at a margin of 1.42% p.a. over LIBOR. Its direct borrowing cost is 10.47% p.a. in the fixed rate bond market. In contrast, B.D. Energy, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 7.20% p.a. and floating rate funds at LIBOR + 0.29% p.a. Suppose they enter into an interest rate swap contract, which a broker agrees to arrange for a fee of 0.25% p.a. and they agree to split the cost savings equally. Due to this arrangement, Press F will have achieved a cost of ____ p.a. for its fixed rate money and B.D. Energy will have achieved a cost of ____ p.a. over LIBOR for its floating rate money?

Select one:

a. 9.90%; LIBOR-0.655%

b. 9.525%; LIBOR-0.655%

c. 9.40%; LIBOR-0.78%

d. 9.90%; LIBOR-1.78%

e. 8.145%; LIBOR+0.475%

Answer #1

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