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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Ravi Ltd has a Rs 50 crore floating-rate loan at MIBOR + 1%. It enters a swap paying fixed 8% and receiving MIBOR on the same notional. If MIBOR for a period is 6.5% per annum, what is Ravi Ltd's effective annual interest rate on the loan for that period, ignoring any swap fees?

The swap converts only the MIBOR part to fixed. The MIBOR received offsets MIBOR paid on the loan, leaving the fixed 8% plus the 1% loan spread, so the effective cost is 9.00% per annum.

  1. A9.00%Correct
  2. B8.00%
  3. C6.50%
  4. D7.50%

Explanation

Loan cost = MIBOR + 1% = 7.5%. Swap: pays 8%, receives 6.5%, net cost 1.5%. Total = 7.5% + 1.5% = 9.0%. Equivalently, MIBOR cancels, leaving 8% fixed + 1% spread = 9%. 8% is wrong because the loan spread of 1% is still payable.

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