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Question
Zenith Company has borrowed $1 million from Strong Capital Bank at an interest rate of LIBOR plus 2 percent. However, the CFO of Zenith fears that the short-term interest rates may rise in the near future and purchases an interest-rate cap of 5 percent from Strong Capital Bank. What will be the annual interest outflow for Zenith, if the LIBOR rate rises to 3.5 percent?
A. $50,000
B. $45,000
C. $55,000
D. $5,000
E. Zero
Answer
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