Question

Question 17 0.1 pts Georgetown Investments Corp. ("GIC") on its most recent balance sheet has $750 million of assets financed with $200 million of floating-rate short-term debt, $300 million of long- term fixed rate debt, and $250 million of common stock. Its total assets include $150 million of floating-rate short-term interest-bearing notes. Taylor Smith, one of the major stockholders, told the CEO of GIC at the last board meeting that she was very concerned about the company's financial risk exposures inherent in its assets and liabilities. The CEO told her that the CFO of GIC was working on a plan to completely hedge the company's interest rate risk (i.e., income gap) and would report back at the next board meeting. At the next board meeting, the CFO described the financial risk hedging plan. The CFO said the company had entered into a 3-year interest rate swap, with a notional principal of $50 million, wherein GIC would receive interest income based on a interest rate, and GIC would pay interest expense based on a ___interest rate. fixed: floating floating: fixed floating: floating fixed: fixed

Answer 1

since the total debt exposure in fixed term debt, thus interest rate swap will receive interest income in floating interest rate and GIC would pay fixed interest rate for its interest expense.

Thus the correct answer is option B.