Company A, a low-rated firm, desires a fixed-rate, long-term loan. Company A currently has access to floating interest rate funds at LIBOR+1.25% and its direct borrowing cost is 10.25% in the fixed-rate bond market. In contrast, company Z, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 8.75% and floating-rate funds at LIBOR+0.75%.

If the companies were to enter into an interest rate swap, what type of debt would each issue directly to investors?

Group of answer choices

Both companies would issue floating-rate

Both companies would issue fixed-rate

Company A would issue fixed-rate; Z would issue floating-rate

Company A would issue floating-rate; Z would issue fixed-rate