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Sir please explain the c part of que, how they have calculated the PV of Savings and at how they have calculated discount rates?
As explained in part (b) the company will save 0.5% due to the swap and so they will end up effectively paying interest of 5.7% initially increasing to 6.2% after 6 months.
The discount factors are calculated using the formula as normal. So, for example, the discount factor for the saving in 18 months time (which is 1.5 years) is
1 / ((1.062)^1.5)This is the only time ever that an exam question has required 6-monthly discounting and I will be surprised if it is ever required again – the examiner has changed twice since this question was set.
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