The following statement is to be used in answering questions
Company X, a low rated firm, desires a fixed rate, long term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed rate bond market. In contrast, company Y, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 9% and floating rate funds at LIBOR + 1/4%. Suppose they split the cost savings.
-much would Y pay for its floating-rate funds?
A) LIBOR -25%
B) LIBOR -.50%
C) LIBOR
D) LIBOR + .5%

Question

The following statement is to be used in answering questions 
Company X, a low rated firm, desires a fixed rate, long term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed rate bond market. In contrast, company Y, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 9% and floating rate funds at LIBOR + 1/4%. Suppose they split the cost savings.
-much would Y pay for its floating-rate funds?
A) LIBOR -25%
B) LIBOR -.50%
C) LIBOR
D) LIBOR + .5%

Quizplus · Accepted Answer

Company Y has access to fixed rate funds at 9% and floating rate funds at LIBOR + 1/4%. If they split the cost savings, then they would pay LIBOR - 25% for their floating-rate funds.

The Following Statement Is to Be Used in Answering Questions