Firm A is paying $300,000 in fixed interest payments a year while Firm B is paying LIBOR plus 30 basis points on $5 million loans.The current LIBOR rate is 5.5 percent.Firm A and B have agreed to swap interest payments.What is the net payment between these firms this year?
A)Firm A pays $10,000 to Firm B
B)Firm B pays $10,000 to Firm A
C)Firm B pays $12,500 to Firm A
D)Firm A pays $15,000 to Firm B
E)Firm B pays $15,000 to Firm A

Question

Quizplus · Accepted Answer

Firm B's payment is LIBOR (5.5%) + 0.3% = 5.8% on $5 million, which is $290,000. Firm A pays $300,000. The difference is $10,000, so Firm B pays $10,000 to Firm A.

Firm a Is Paying $300,000 in Fixed Interest Payments a Year