CMA Final · Strategic Financial Management · Swaps
A bank quotes a 3-year swap with fixed rate 9% against MIBOR. A firm with Rs 50 crore floating-rate borrowing at MIBOR+0.75% enters this swap as the fixed payer. What is its effective fixed borrowing cost?
The effective cost is 9.75%. The MIBOR received from the swap offsets the MIBOR component of the loan, leaving the 0.75% spread paid to the lender plus the 9% fixed rate paid on the swap.
- A9.00%
- B8.25%
- C9.75%Correct
- D10.50%
Explanation
Firm pays MIBOR+0.75% to its lender, receives MIBOR from the swap and pays 9% fixed. Net = 0.75% + 9% = 9.75%. Choosing 9.00% ignores the loan spread; 8.25% subtracts the spread wrongly.
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