CMA Final · Strategic Financial Management · Swaps
Tata Components Ltd has a 5-year floating-rate loan of Rs 50 crore at MIBOR + 1.00% and enters a plain vanilla swap, paying fixed 8.50% and receiving MIBOR on a notional of Rs 50 crore. Ignoring other costs, what is its effective annual interest rate on the loan after the swap?
The effective rate is 9.50% fixed. The MIBOR received under the swap offsets the MIBOR paid on the loan, leaving the 1.00% spread plus the 8.50% fixed swap rate payable.
- A9.50%Correct
- B7.50%
- C8.50%
- D10.50%
Explanation
Loan cost: MIBOR + 1.00%. Swap: pays 8.50% fixed and receives MIBOR. Net = MIBOR + 1.00% + 8.50% - MIBOR = 9.50%. The 7.50% option wrongly subtracts the spread; 8.50% ignores the loan spread.
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