There are two companies, Company A with a high credit risk and Company B with a
ID: 2804459 • Letter: T
Question
There are two companies, Company A with a high credit risk and Company B with a low credit risk, are considering an interest rate swap. Each can borrow at the following rates. Company A Fixed Rate 8%, Variable Rate 5%. Company B Fixed Rate 12%, Variable Rate 7%. An interest swap would be beneficial to both parties if:
Company A wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate
Company B wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate
Both firms want to borrow at the variable rate.
None of the above
Explanation / Answer
Option C would be beneficial to both of them since Variable Rate of Interest is low for both the firms.