Company a Can Issue Floating-Rate Debt at LIBOR + 1

Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

A) a pays a fixed rate of 9%, b pays libor + 1.5%.
B) a pays a fixed rate of 8.95%, b pays libor + 1.45%.
C) a pays libor plus 1%, b pays a fixed rate of 9.4%.
D) a pays a fixed rate of 7.95%, b pays libor.
E) none of the above answers is correct.

Correct Answer:

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