CMA Final · Strategic Financial Management · Swaps
Meera Textiles has a floating-rate loan of ₹10 crore at MIBOR + 1%. It enters a plain vanilla swap as the fixed-rate payer, paying 8% fixed and receiving MIBOR on the same notional. What is its effective annual interest rate after the swap, ignoring costs?
The effective cost is 9% fixed. The MIBOR received on the swap offsets the MIBOR paid on the loan, leaving the 1% loan spread plus the 8% fixed swap rate, which totals 9% per annum.
- A9% fixedCorrect
- B7% fixed
- CMIBOR + 9%
- DMIBOR + 7%
Explanation
Meera pays MIBOR + 1% on the loan, pays 8% fixed on the swap and receives MIBOR. The MIBOR components cancel, leaving 1% + 8% = 9% fixed. The 7% option wrongly subtracts the 1% spread from the swap rate.
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One question tells you little. A timed set on Swaps shows your real accuracy, how long you take and where you lose marks.
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