CMA Final · Strategic Financial Management · Swaps
Aarav Ltd can borrow fixed at 9% or floating at MIBOR + 1.0%. Bharat Ltd can borrow fixed at 10.5% or floating at MIBOR + 1.5%. They agree to swap so that the total quality spread benefit is shared equally. What is the total gain from the swap, per annum?
The total gain is 1.0% per annum. It is the difference between the fixed-rate spread of 1.5% and the floating-rate spread of 0.5%, which is the net comparative advantage available to share between the two firms.
- A1.0%Correct
- B0.5%
- C1.5%
- D2.0%
Explanation
Fixed differential = 10.5 - 9 = 1.5%. Floating differential = 1.5 - 1.0 = 0.5%. Quality spread differential = 1.5 - 0.5 = 1.0%. Adding the two differentials instead gives 2.0%, which is wrong.
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