Company A can borrow money at a fixed rate of 9% or a variable rate set at prime plus 1% Company B can borrow money at a variable rate of prime plus 2% or a fixed rate of 8.25% Company A prefers a fixed rate and company B prefers a variable rate. Given this information, which one of the following statements is correct?
A) Company A can swap with B and pay a fixed rate of 8%
B) If Company A swaps with B, Company A should end up paying a fixed rate between 8¼ % and 9%
C) If Company B swaps with Company A then Company B will end up paying a fixed rate of 8%
D) Company B can swap with Company A such that Company B receives a 9¼ % fixed rate.
E) There are no terms under which both Company A and Company B can swap interest rates and both realize a profit.

Question

Quizplus · Accepted Answer

Company A prefers a fixed rate but can only get 9% on its own, while Company B can secure a fixed rate at 8.25%. By swapping, Company A aims to pay less than its standalone fixed rate of 9%, and Company B, preferring a variable rate, would benefit from terms better than its standalone option of prime plus 2%. The swap would allow Company A to pay a fixed rate between 8.25% (Company B's rate) and 9%, benefiting both parties.

Company a Can Borrow Money at a Fixed Rate of 9