If a company with a fixed-rate debt of 11% enters into a swap and pays floating-rate debt of BBSW+1.20% and receives fixed-rate payments of 9%,its net cost of debt becomes:
A) 11%
B) BBSW+0.20%
C) BBSW+2.20%
D) 12%

Question

Quizplus · Accepted Answer

The company is paying fixed-rate debt at 11% but receiving fixed-rate payments of 9%. This means that they will save 2% on their debt payment. However, they are receiving floating-rate payments of BBSW+1.20%. If we assume BBSW is around 2%, then the net rate they are paying is BBSW+0.20% (2% - 1.2%). Therefore, the company’s net cost of debt becomes BBSW+0.20%.

If a Company with a Fixed-Rate Debt of 11% Enters