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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Ganga Ltd has a floating-rate loan at MIBOR + 1% and enters a plain-vanilla swap on notional ₹20 crore, paying fixed 8.50% and receiving MIBOR, settled annually. Its alternative was a fixed borrowing at 10.00%. In a year MIBOR is 7.80%. Ignoring the swap's day-count, what is Ganga's net effective interest cost for that year in rupees on the notional, and is it fixed?

Net cost is ₹1.90 crore, effectively fixed at 9.50%. The loan costs MIBOR plus 1%, the swap converts MIBOR to 8.50% fixed, so the total is 8.50% plus the 1% spread, which is 9.50% of ₹20 crore, whatever MIBOR turns out to be.

  1. A₹1.90 crore, effectively fixed at 9.50%Correct
  2. B₹1.70 crore, effectively fixed at 8.50%
  3. C₹1.76 crore, floating at 8.80%
  4. D₹2.00 crore, effectively fixed at 10.00%

Explanation

Loan interest = 7.80%+1% = 8.80%. Swap: pays 8.50%, receives 7.80%, net swap cost 0.70%. Total = 8.80%+0.70% = 9.50%. This equals 1% spread plus 8.50% fixed, regardless of MIBOR. 9.50% x ₹20 crore = ₹1.90 crore. Option 2 forgets the loan spread.

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