Company A has an investment that pays a fixed rate of 5% on a principle of...
Company A has an investment that pays a fixed rate of 5% on a principle of $100 million. It enters a swap agreement with a bank where it pays a fixed rate of 5.015% and receives LIBOR. Which of the followings best describes the effective interest earned after the swap is created.
A) LIBOR
B) LIBOR-0.015%
C) 4.985%
D) 5.015%
Homework Answers
On investment company get a fixed rate = 5%
On swap agreement, company pays 5.015% to bank and receives LIBOR. So effective rate of swap agreement = LIBOR - 5.015%
The effective interest earned after the swap is created = LIBOR - 5.015% + 5% = LIBOR - 0.015%
So, option B is correct.
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