H Company has a fixed rate load at 10.

Company currently pays fixed 10% but wants variable.

Swap quotes: 3.1% (bid), 3.5% (ask).

To convert to variable, it receives fixed and pays LIBOR. So it receives the bid rate 3.1%.

Net outflow:

Pay 10% on loan

Receive 3.1% fixed from swap

Pay LIBOR on swap

Net cost = LIBOR + (10% − 3.1%) = LIBOR + 6.9%.

Answer: C. Risk-free rate + 6.9%