CMA Final · Strategic Financial Management · Swaps
Kaveri Textiles has a 3-year floating-rate loan of Rs 50 crore at MIBOR + 1%. It enters a plain vanilla interest rate swap as fixed-rate payer at 8.5% against receiving MIBOR on the same notional. Ignoring any swap dealer spread, what is Kaveri's effective annual interest rate on the loan after the swap?
The effective rate is 9.5%. The MIBOR received on the swap offsets the floating MIBOR paid on the loan, leaving the fixed 8.5% swap payment plus the 1% loan spread, which totals 9.5%.
- A9.5%Correct
- B7.5%
- C8.5%
- D10.5%
Explanation
Kaveri pays MIBOR + 1% on the loan, receives MIBOR from the swap, and pays 8.5% fixed. Net = MIBOR + 1% - MIBOR + 8.5% = 9.5%. The 7.5% option wrongly subtracts the 1% spread.
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