Firm A is paying £750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on £10,000,000 loans.The current LIBOR rate is 6.5%.Firm A and B have agreed to swap
Interest payments.What is the net payment this year?
A)Firm A pays £750,000 to Firm B
B)Firm B pays £725,000 to Firm A
C)Firm B pays £25,000 to Firm A
D)Firm A pays £25,000 to Firm B
E)None of the above.

Question

Quizplus · Accepted Answer

Firm B's interest payment is calculated as 6.5% (LIBOR rate) + 0.75% (75 basis points) = 7.25% of £10,000,000, which equals £725,000. Since Firm A is paying £750,000, the net payment from Firm A to Firm B is £750,000 - £725,000 = £25,000.

Firm a Is Paying £750,000 in Interest Payments a Year