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CMA Final · Strategic Financial Management · Swaps

Meridian Textiles Ltd has a Rs 50 crore floating-rate loan at MIBOR + 1.00%. It enters a plain vanilla swap as fixed-rate payer at 7.50% against receiving MIBOR on the same notional, with annual settlement. If MIBOR resets at 6.80% for the period, what is Meridian's net effective annual interest cost, as a rate, after the swap?

The net cost is 8.50%. The MIBOR received on the swap offsets the MIBOR paid on the loan, leaving the fixed swap rate of 7.50% plus the loan's 1.00% spread. Floating rate movements therefore do not change the effective cost.

  1. A8.50%Correct
  2. B7.50%
  3. C8.30%
  4. D9.30%

Explanation

Loan cost = MIBOR + 1.00% = 7.80%. Swap: pays 7.50% fixed, receives 6.80% MIBOR. Net cost = 7.80 + 7.50 - 6.80 = 8.50%, which equals fixed 7.50% plus the 1.00% spread. Option 8.30% wrongly uses the loan cost without the spread difference.

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