Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent.Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent.Murray's prefers a variable rate and Fred's prefers a fixed rate.Given this information,which one of the following statements is correct?
A)After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent.
B)Both companies can profit in a swap which will allow Murray's to pay a variable rate of prime plus one percent.
C)Fred's will end up with a fixed rate of 10 percent.
D)Fred's has the best chance of profiting if it does an interest rate swap with Murray's.
E)There are no terms under which Murray's and Fred's can swap interest rates.

Question

Quizplus · Accepted Answer

Based on the given interest rates, Murray's can borrow at a variable rate of prime plus 2.25 percent, and Fred's can borrow at a fixed rate of 12 percent. Murray's prefers a variable rate, and Fred's prefers a fixed rate. Therefore, an interest rate swap can be arranged where Murray's borrows at a fixed rate of 10.5 percent from Fred's, and Fred's borrows at a variable rate of prime plus 2.25 percent from Murray's. After the swap, Murray's may be able to pay prime plus 2 percent, which is lower than their original variable rate of prime plus 2.25 percent. Hence, option A is correct. Option B is incorrect because it suggests that a swap can be arranged where both companies can profit, which is unlikely to happen. Options C, D, and E are also incorrect based on the given information.

Murray's Can Borrow Money at a Fixed Rate of 10