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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Arvind Ltd has a ₹50 crore floating-rate loan costing MIBOR + 1% p.a., reset annually. It enters a plain vanilla swap in which it pays fixed 7.5% p.a. and receives MIBOR on ₹50 crore. If MIBOR for the year is 7.0%, what is Arvind's total annual interest cost on the loan after the swap?

The total annual interest cost is ₹4,25,00,000. The swap converts the floating exposure to a fixed 7.5% with the 1% spread added, so the effective rate is 8.5% on ₹50 crore. Equivalently, loan interest of 8% plus a net swap payment of 0.5% gives the same figure.

  1. A₹4,25,00,000Correct
  2. B₹4,00,00,000
  3. C₹3,75,00,000
  4. D₹3,50,00,000

Explanation

After the swap, the MIBOR received offsets the MIBOR paid on the loan. The effective cost is 7.5% fixed + 1% spread = 8.5%, so 8.5% × 50 crore = ₹4,25,00,000. Check: loan interest 8% = ₹4 crore, plus net swap payment (7.5% − 7.0%) = 0.5% = ₹25 lakh, giving ₹4.25 crore. ₹4,00,00,000 ignores the swap. ₹3,75,00,000 treats the net swap payment as a receipt.

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