Question

Desert Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 8%. The firm then enters into an interest rate swap where it pays a LIBOR rate of 5% and receives a fixed 6% on notional principal of $100 million. What is the firm’s effective interest rate on its borrowing?

Answer 1

Answer:

7%

Explanation:

the firm’s effective interest rate on its borrowing= %paid in form of LIBOR+ % at which bond was issued- % of fixed received.

=5%+ 8%- 6%

=7%