If the company enters into the swap and LIBOR remains at 5%, what will the company's interest cost be?

If the company enters into the swap and LIBOR remains at 5%, what will the company’s interest cost be?

A company currently has a 6.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.

The bank has quoted the following swap rate:

• 5.50% – 5.55% in exchange for LIBOR

LIBOR is currently 5%.

If the company enters into the swap and LIBOR remains at 5%, what will the company’s interest cost be?
A . 5.00%
B . 5.75%
C . 5.70%
D . 6.25%

Answer: B