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CMA Final · Strategic Financial Management · Interest Rate Derivatives

A firm has a floating-rate loan of Rs 20 crore at MIBOR + 1.5%. It enters a 2-year plain vanilla swap as fixed-rate payer at 8.20% against receiving MIBOR, on the same notional. In a year when MIBOR averages 7.00% (assume annual settlement, no day-count issue), what is the firm's net effective interest cost for that year in rupees?

The net cost is Rs 1,94,00,000. The swap converts the floating exposure to fixed 8.20% plus the 1.5% spread, giving 9.70% on Rs 20 crore. Loan interest of 1.70 crore plus net swap payment of 0.24 crore also gives 1.94 crore.

  1. ARs 1,76,00,000Correct
  2. BRs 1,64,00,000
  3. CRs 1,94,00,000
  4. DRs 1,70,00,000

Explanation

Loan interest paid = 20 cr x 8.5% = Rs 1.70 cr. Swap: pays 8.20% = 1.64 cr, receives 7.00% = 1.40 cr, net swap payment 0.24 cr. Total = 1.70 + 0.24 = Rs 1.94 cr. Check: effective rate = 8.20% + 1.5% = 9.70% x 20 cr = Rs 1.94 cr. So the correct answer is Rs 1,94,00,000.

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