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A company can raise funds for five years at a floating rate of LIBOR plus 75 basis points, which will be reset every quarter. A
A company can raise funds for five years at a floating rate of LIBOR plus 75 basis points, which will be reset every quarter.
A LIBOR-based swap, with a 5-year term, with interest payments exchanged every quarter, and with a floating rate equal to the 3-month LIBOR rate, has a swap rate of 5.25%.
Assume that the company's default risk rating is unchanged over a five-year period.
At what effective fixed rate of interest can the company raise funds by using the swap ?
a. 6.00%
b. 5.25%
c. 4.50%
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