CMA Final · Strategic Financial Management · Swaps
Mehta Ltd has a Rs 20 crore floating-rate loan at MIBOR + 1.5%. It enters a swap in which it pays fixed 8.5% and receives MIBOR on Rs 20 crore. What is Mehta Ltd's effective annual interest cost on the loan after the swap?
The effective cost is 10.0% fixed. MIBOR paid on the loan is offset by MIBOR received on the swap, leaving the 1.5% loan spread plus the 8.5% fixed swap payment, which together total 10.0%.
- A10.0% fixedCorrect
- B7.0% fixed
- C8.5% fixed
- DMIBOR + 10.0%
Explanation
Pay on loan: MIBOR + 1.5%. Receive from swap: MIBOR. Pay on swap: 8.5%. Net = MIBOR + 1.5% - MIBOR + 8.5% = 10.0% fixed. Option 7.0% wrongly subtracts the spread.
Did you get it right without looking?
One question tells you little. A timed set on Swaps shows your real accuracy, how long you take and where you lose marks.
More Swaps questions
- A company has a 1-year-remaining swap on Rs 10 crore notional in which it receives fixed 8% and pays floating, with semi-annual settlements.…
- 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…
- Ishaan Ltd has Rs 10 crore of USD-linked debt costing 5% in dollars and wants to convert it into rupee debt via a currency swap. The initial…
- A 2-year swap has annual settlements. Zero-coupon discount factors are year 1: 0.95 and year 2: 0.89. What is the par swap fixed rate (to tw…
- A 2-year annual-pay swap has notional Rs 10 crore. Zero-coupon discount factors are 0.9524 for year 1 and 0.9070 for year 2. What is the fai…
- A 2-year annual-pay swap has spot zero rates of 6% for year 1 and 7% for year 2. What is the fair fixed swap rate, using discount factors fr…