Question 1

In a fixed-for-floating currency swap, principal and fixed interest payments in one currency are swapped for the principal and floating rate interest payments in another currency.

Select one:

A.True

B. False

Question 2

ABC Ltd can borrow fixed rate for 5 years at 5% and floating rate at LIBOR + 0.1%. XYZ Ltd can borrow fixed for 5 years at 7% and floating rate at LIBOR+0.5%. Both companies enter a swap with each other to exploit their comparative advantages. Under the swap, one party pays fixed at 5.5% and the other pays LIBOR. What is the effective borrowing cost for XYZ after the swap?

Select one:

a. 6%

b. 5.5%

c. LIBOR-0.5%

d. LIBOR