ABC Corp. has a floating rate debt for which the firm pays an interest rate of LIBOR + 1%. The firm enters into an interest rate swap on the same notional principal as the floating rate debt. In the swap, the firm receives LIBOR and pays 6.5%. What is the firm’s effective borrowing cost with the interest rate swap?
a. 5.5%
b. 6.5%
c. 7.5%
d. LIBOR+0.5%
e. LIBOR-0.5%