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CMA Final · Strategic Financial Management · Swaps

Asha Textiles has a Rs 50 crore floating-rate loan at MIBOR + 1.00% and enters a plain vanilla interest rate swap in which it pays a fixed 7.50% and receives MIBOR on the same notional. Ignoring day-count effects, what is Asha's effective annual borrowing cost after the swap?

The effective cost is 8.50%. The MIBOR received on the swap offsets the MIBOR paid on the loan, leaving the fixed 7.50% swap rate plus the 1.00% loan spread, which gives a fixed all-in borrowing cost of 8.50%.

  1. A8.50%Correct
  2. B6.50%
  3. C7.50%
  4. D9.50%

Explanation

Asha pays MIBOR + 1% on the loan, receives MIBOR from the swap and pays 7.50% fixed. Net = MIBOR + 1% - MIBOR + 7.50% = 8.50%. Option 6.50% wrongly subtracts the 1% spread; 7.50% ignores the loan spread.

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