Question

Company X and Company Y have been offered the following borrowing rates Fixed Rate Floating Rate...

Company X and Company Y have been offered the following borrowing rates

Fixed Rate Floating Rate
Company X 3.5% 3-month LIBOR plus 10 bps
Company Y 4.5% 3-month LIBOR plus 30 bps

Which of the following is true?

Company X has an comparative advantage in the fixed rate market.
There is no comparative advantage for Company Y.
Company Y has an comparative advantage in the fixed rate market.
Company X has an comparative advantage in the floating rate market.
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

since the given rates are borrowing rate hence lower will be the better.

I believe the Option B is totally correct. Company Y is not having any comparative advantage. Since Company Y have higher fixed and floating rate as compare to Company X and so i does not have any comparative advantage.

The other Option are also Correct partially like option A Company X has comparative advantage on Fixed rate but it has also advantage in floating rate also as because it has lower borrowing floating rate. So option D is also partially correct. Option C is totally wrong because Y dooes Not have any advantage

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Company X and Company Y have been offered the following rates Fixed Rate Floating Rate Company...
Company X and Company Y have been offered the following rates Fixed Rate Floating Rate Company X 3.5% 3-month LIBOR plus 10bp Company Y 4.5% 3-month LIBOR plus 30 bp Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company X’s effective borrowing rate? A. 3-month LIBOR−30bp B. 3.1% C. 3-month LIBOR−10bp D. 3.3%
PUMA SE and Adidas AG have been offered the following rates:          Fixed Rate Floating Rate...
PUMA SE and Adidas AG have been offered the following rates:          Fixed Rate Floating Rate PUMA SE 3.5% 3-month LIBOR plus 10bp Adidas AG 4.5% 3-month LIBOR plus 30 bp Suppose that PUMA SE borrows fixed and Adidas AG borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is PUMA SE’s effective borrowing rate? (Show Work)
Companies X and Y have been offered the following rates per annum on a $5 million...
Companies X and Y have been offered the following rates per annum on a $5 million 10-year investment: Fixed Rate Floating Company X 8% LIBOR+0.3% Company Y 8.8% LIBOR Company X requires a floating-rate investment; company Y requires a fixed-rate investment. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally attractive to X and Y. (Make all the floating interests equal to the Libor rate).
Companies X and Y have been offered the following annual interest rates with semi-annual compounding on...
Companies X and Y have been offered the following annual interest rates with semi-annual compounding on $5 million 6-year loans. Company Fixed Rate (%) Floating Rate X 5.00% LIBOR Y 7.00% LIBOR + 1% Company X borrows initially at a fixed rate but would like to have a floating rate loan. Company Y borrows initially at a floating rate but would like a fixed-rate loan. a)    What is the Quality Spread Differential (QSD)? b)    What is the necessary condition for a fixed-for-floating...
AAA and BBB both want to borrow $50 million for five years and have been offered...
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? BBB borrows at 6.5% and AAA at 8%, and then they enter into a swap AAA borrows at 6.5% and BBB at LIBOR, and then...
2. Companies AAACorp and BBBCorp have been offered the following rates per annum on a $10...
2. Companies AAACorp and BBBCorp have been offered the following rates per annum on a $10 million five-year loan: Fixed rate Floating rate AAA Corp 4.0% LIBOR - 0.1% BBB Corp 5.2% LIBOR - 0.6% Design an interest rate swap that will make all parties involved (bank, two companies) attractive assuming that BBBCorp wants to borrow at a fixed rate of interest, whereas AAACorp wants to borrow at a flotation rate of interest linked to six-month LIBOR.
32. AAA and BBB both want to borrow $50 million for five years and have been...
32. 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 8.0% LIBOR BBB 6.5% 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? A) AAA borrows at LIBOR and BBB at 8.0%, and then they enter into a swap B) AAA borrows at LIBOR and BBB at...
company B requires a fixed rate loan. Design a swap that will net a bank, acting...
company B requires a fixed rate loan. Design a swap that will net a bank, acting as intermediary, 0.2% per annum and that will appear equally attractive to both companies. Companies A and B have been offered the following rates per annum on a $10 million five-year loan: Fixed Rate Floating Rate Company A 5.25% LIBOR + 0.35% Company B 6.85% LIBOR + 1.0% Company A requires a floating rate loan;
Consider the borrowing costs faced by the following three companies: Fixed Floating A 5.0% LIBOR+0.6% B...
Consider the borrowing costs faced by the following three companies: Fixed Floating A 5.0% LIBOR+0.6% B 6.0% LIBOR+1.3% C 7.0% LIBOR+2.5% Assume if entering the swap transaction, they split the possible savings equally. A) Company A and B want to engage in the swap transaction. What is the possible combined savings for both companies? B) Suppose company C wants to borrow fixed rate funds. Is it possible for C to reduce its cost of borrowing below 7%, and if so...
Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding...
Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding at 3.5% and floating rate at Libor-1%. Firm B: Fixed-rate funding at 4.5% and floating rate at Libor+2%. Assume A prefers fixed rate and B prefers floating rate. Show how these two firms can both obtain cheaper financing using a swap. What swap strategy would you suggest to the two firms if you were an unbiased advisor? What is the net cost to each...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT