FRM Part I · FRM Exam Part I · Swaps
A company has issued a floating-rate loan paying SOFR + 1.00% and wants fixed-rate funding. It enters a swap paying 4.50% fixed and receiving SOFR. What is the company's effective all-in fixed borrowing rate, ignoring day-count effects?
The effective fixed rate is 5.50%. The SOFR received on the swap offsets the SOFR paid on the loan, leaving the 1.00% loan spread plus the 4.50% fixed swap rate. The spread is not hedged by the swap.
- A5.50%Correct
- B3.50%
- C4.50%
- D5.00%
Explanation
Pays SOFR + 1.00% on the loan, receives SOFR on the swap, pays 4.50% fixed. Net = 1.00% + 4.50% = 5.50%. Subtracting the spread gives 3.50%, and ignoring the spread gives 4.50%.
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