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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