Question
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
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%.
Assume the two companies enter into an interest rate swap and Company A gets 88 percent of the maximum savings. What would be the net cost or interest rate on the debt for Company A after the interest rate swap is completed? Enter your answer as a % and with two decimals (i.e., enter 9.80 to mean 9.80% or 0.098)
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