A company is concerned that a high proportion of its debt portfolio consists of variable...

CIMA F3 Question Answer

A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an interest rate of LIBOR ' 1 .0%.

It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional finance cost this might create.

A bank has quoted swap rates of 3% 3.5% against LIBOR.

Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?

No, because it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap.

Yes, because it will have lower interest rate risk and interest cost remains the same.

Yes, because interest cost will decrease with the interest rate swap in place.

No, because interest cost will increase with the interest rate swap in place.

CIMA F3 Summary

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