CMA Final · Strategic Financial Management · Swaps
Rao Ltd pays fixed 8% and receives MIBOR on a notional of Rs 50 crore under a half-yearly settled interest rate swap. At the start of a half-year MIBOR is 9% p.a. Using simple half-year accrual (rate/2), what is the net settlement for Rao Ltd for the period?
Rao Ltd receives a net Rs 25 lakh. It receives floating interest of Rs 2.25 crore (9% for half a year on Rs 50 crore) and pays fixed interest of Rs 2.00 crore (8% for half a year), so the difference in its favour is Rs 25 lakh.
- AReceives Rs 25 lakhCorrect
- BPays Rs 25 lakh
- CReceives Rs 50 lakh
- DPays Rs 50 lakh
Explanation
Floating received = 50 crore x 9% x 1/2 = Rs 2.25 crore. Fixed paid = 50 crore x 8% x 1/2 = Rs 2.00 crore. Net = Rs 0.25 crore = Rs 25 lakh received. Rs 50 lakh results from forgetting to halve the rate differential.
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