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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Dec 14 Keshi Co part a
Hello,
Help, this i smy weakest topic.
1. How was the cost of borrowing calculated; 4.7% and 3.7?
2. How was the effective interest rate calculated?
Many thanks
Maureen
Without the swap, if borrowing fixed then Keshi would have paid 5.5%
There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46%
Therefore Keshi must end up paying 5.5% – 0.46% = 5.04%.
But because of swapping, Keshi borrows floating and pays L + 0.4%
To make things ‘work’ the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% – L = 0.4%
Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges – the remainder is 4.94%
So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%
Thank you very much for the reply.
Regards
Maureen
You are very welcome 🙂