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CMA Final · Strategic Financial Management · Swaps

Asha Ltd has a 5-year, Rs 50 crore floating-rate loan at MIBOR + 1% and enters a plain vanilla interest rate swap in which it pays a fixed 8% and receives MIBOR on the same notional. In a settlement period MIBOR is 7%. Ignoring day-count, what is Asha's effective annual interest cost on the loan for that period?

The effective cost is 9%. The swap receipt of MIBOR offsets the MIBOR on the loan, leaving the fixed swap rate of 8% plus the 1% loan spread, so the borrower has effectively converted to a fixed rate of 9%.

  1. A8.0%
  2. B9.0%Correct
  3. C10.0%
  4. D7.0%

Explanation

Loan cost = MIBOR + 1% = 8%. Swap: pays 8% fixed and receives 7% MIBOR, net swap outflow 1%. Total = 8% + 1% = 9%. Equivalently, the MIBOR cancels, leaving fixed 8% + spread 1% = 9%. Option 8% forgets the spread.

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