This question tests understanding of interest rate swaps, a core topic in CIMA F3: Financial Strategy, particularly under financial risk management.
Step 1: Identify the company’s current position
HHH Company currently has fixed-rate debt at 10.0%
It wants to swap to variable interest
Its floating-rate borrowing cost is risk-free rate + 8%
Step 2: Interpret the swap quotation
The bank quotes swap rates of:
3.1% (bid)
3.5% (ask)
In CIMA F3:
If a company wants to pay fixed and receive floating, it must pay the ask rate.
Therefore, HHH will pay fixed 3.5% and receive floating (risk-free rate) under the swap.
Step 3: Combine the loan and the swap
Component
Cash flow
Fixed loan
Pay 10.0% fixed
Swap
Pay 3.5% fixed, receive risk-free rate
Net fixed paid:
10.0%−3.5%=6.5%10.0\% - 3.5\% = 6.5\%10.0%−3.5%=6.5%
So after the swap, the company effectively pays:
Risk-free rate+6.5%\text{Risk-free rate} + 6.5\%Risk-free rate+6.5%
Step 4: Select the correct option
Risk-free rate + 6.5% ✔
