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Hello John,
In (b) (i), the difference in fixed rates is 1.8% and the difference in variable rates is 0.2%.
Therefore shouldn’t the savings before the bank charge be 1.6% (1.8%-0.2%). In the answers, they have taken the savings to be 2% (1.8%+0.2%).I came to this conclusion based on Step 3 in pg 392 in the Kaplan study text
Do help me, thanks.I do not have the Kaplan Study Text. However I do have the original exam question and the overall saving before bank charges is indeed 2%.
I prefer to calculate it the way I show in my free lectures because I think it is more logical (and therefore easier to remember).
If Buryecs were to borrow fixed and the counterparty floating, then in total the interest would be 4 + bank rate + 0.4% = bank rate + 4.4%
If Buryecs were to borrow floating and the counterparty fixed, then in total the interest would be Bank rate + 0.6% + 5.8% = bank rate + 6.4%.The difference between the two totals, and therefore the saving to be made, is 2%.
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