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CMA Final · Strategic Financial Management · Interest Rate Derivatives

A company has a floating-rate loan of ₹50 crore at MIBOR + 1%. It enters a plain-vanilla swap, paying fixed 8.40% and receiving MIBOR on the same notional. For one annual period MIBOR resets at 7.60%. What is the company's net effective interest cost on the loan plus swap for that period?

The effective cost is 9.40% a year. The swap converts MIBOR exposure into fixed 8.40%, and the loan spread of 1% stays on top, so cost equals 8.40% plus 1%. Checking: loan 8.60% plus net swap payment 0.80% also gives 9.40%.

  1. A9.00% p.a.
  2. B9.40% p.a.Correct
  3. C8.40% p.a.
  4. D10.00% p.a.

Explanation

Loan cost = 7.60% + 1% = 8.60%. Swap: pays 8.40%, receives 7.60%, net swap payment 0.80%. Total = 8.60% + 0.80% = 9.40%. Equivalently fixed 8.40% + 1% spread = 9.40%. Option 8.40% ignores the spread. Option 9.00% subtracts incorrectly. Option 10.00% adds the swap net both ways.

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