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CMA Final · Strategic Financial Management · Swaps

Company X can borrow fixed at 9% or floating at MIBOR + 1%. Company Y can borrow fixed at 10.5% or floating at MIBOR + 1.2%. A bank arranges a swap and the total interest-cost saving is shared equally between X and Y, with the bank taking no fee. What is the total saving available from the swap?

The total saving is 1.3% a year. The fixed-rate gap between the firms is 1.5% while the floating-rate gap is 0.2%, and the difference between these two gaps is the gain available to be shared through the swap.

  1. A1.3% p.a.Correct
  2. B1.5% p.a.
  3. C0.2% p.a.
  4. D1.7% p.a.

Explanation

Quality spread differential = fixed spread (10.5 - 9 = 1.5%) minus floating spread (1.2 - 1.0 = 0.2%) = 1.3%. The total saving is 1.3%, so each gets 0.65%. Using 1.5% ignores the floating-market difference.

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