FRM Part I · FRM Exam Part I · How Do Firms Manage Financial Risk?
A company with floating-rate debt paying SOFR + 1.00% enters a swap as fixed-rate payer at 4.00% against receiving SOFR on the same notional. What is its net effective borrowing rate?
The net cost is a fixed 5.00%. The SOFR received on the swap cancels the SOFR paid on the loan, leaving the 1.00% loan spread plus the 4.00% fixed swap rate. The floating-rate exposure is thereby converted into fixed.
- ASOFR + 1.00%
- BSOFR + 4.00%
- C3.00%
- D5.00%Correct
Explanation
Pays SOFR + 1% on debt, receives SOFR on swap, pays 4% fixed. Net = SOFR + 1% - SOFR + 4% = 5.00%. Option 3.00% subtracts the spread wrongly; SOFR + 1% ignores the swap.
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