Question
Suppose that Dummy Ltd. can borrow $100mil long-term at a cost of 8% p.a. and Intelligent Ltd. can borrow $100mil short-term at a cost equal
Suppose that Dummy Ltd. can borrow $100mil long-term at a cost of 8% p.a. and Intelligent Ltd. can borrow $100mil short-term at a cost equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. pays the LIBOR rate plus 50 bps. to Intelligent Ltd., and Intelligent Ltd. pays 8.5% p.a. fixed to Dummy Ltd. What is the net borrowing cost to each company?
| A. | Net borrowing cost to Dummy Ltd. = LIBOR rate. Net borrowing cost to Intelligent Ltd. = 8% p.a. | |
| B. | Net borrowing cost to Dummy Ltd. = LIBOR rate + 50 bps. Net borrowing cost to Intelligent Ltd. = 9% p.a. | |
| C. | Net borrowing cost to Dummy Ltd. = LIBOR rate + 100 bps. Net borrowing cost to Intelligent Ltd. = 9% p.a. | |
| D. | Net borrowing cost to Dummy Ltd. = LIBOR rate. Net borrowing cost to Intelligent Ltd. = 9% p.a. | |
| E. | Net borrowing cost to Dummy Ltd. = 9% p.a. Net borrowing cost to Intelligent Ltd. = LIBOR rate + 100 bps |
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Financial Management for Public Health and Not for Profit Organizations
Authors: Steven A. Finkler, Thad Calabrese
4th edition
133060411, 132805669, 9780133060416, 978-0132805667
