Explanation:
Comparative advantage is neutralized when the difference in borrowing costs is the same in both markets.
So the floating-rate difference must also be 80 bps.
Company A’s floating rate is LIBOR + 100 bps, so Company B’s floating rate must be:
Thus, the correct answer is D.
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Q-174.4. Company A can borrow at 7.0% in fixed-rate markets and LIBOR plus 100 basis points in floating rate markets. If Company B, which is riskier, can borrow at 7.8% in fixed markets, at which borrowing rate in the floating rate market would any comparative borrowing advantage be neutralized such that NEITHER company has a comparative advantage in the fixed nor floating rate market?
A
LIBOR plus 20 basis points
B
LIBOR plus 80 basis points
C
LIBOR plus 120 basis points
D
LIBOR plus 180 basis points
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