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decembe 14 keshi

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › decembe 14 keshi

  • This topic has 2 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • October 24, 2020 at 5:30 pm #593037
    sephora1
    Member
    • Topics: 53
    • Replies: 77
    • ☆☆

    sir
    i had watched your lecture on interest rate swap.
    then i attempted this question in your method.
    i will type out my logic can you please verify if my thinking is right.
    so for the question it is told that interest rate fluctuates ..it is not mentioned that they want fixed or floating..so i hadread your answerto another student that.. since interestrate fluctuates they wantfixed rate..so ontha t assumption i preparedthis answer..can you please verify the steps:

    keshi rozu total
    own (5.5%) (l+0.3%) (l+5.8)(payableamounts before swap)
    swap(l+.4) (4.6) (l+5)
    ——————–
    0.8(gain) keshi-.56(70%_
    rozu -.24(30%)
    ————————————————————————————————————————————
    swap (4.6) (l+.4)

    k
    pays
    r (0.34) .34

    —————————————————————–
    (4.94) (l+.06)

    k has to pay 4.94+.1=5.04%

    so in this answer…the amount that k pays to r ..is itright ??
    also is my answer presentation ok and right ?

    October 24, 2020 at 6:02 pm #593039
    sephora1
    Member
    • Topics: 53
    • Replies: 77
    • ☆☆

    i have one more doubt regarding this q:
    Borrowing at the floating rate and undertaking a swap effectively fixes the rate of interest at 5·04% for the loan, which is
    significantly lower than the market fixed rate of 5·5%.
    On the other hand, doing nothing and borrowing at the floating rate minimises the interest rate at 4·7%, against the next best
    choice which is the swap at 5·04% if interest rates increase by 0·5%. And should interest rates decrease by 0·5%, then
    doing nothing and borrowing at a floating rate of 3·7% minimises cost, compared to the next best choice which is the 95·50
    option.
    On the face of it, doing nothing and borrowing at a floating rate seems to be the better choice if interest rates increase or
    decrease by a small amount, but if interest rates increase substantially then this choice will no longer result in the lowest cost.
    The swap minimises the variability of the borrowing rates, while doing nothing and borrowing at a floating rate maximises the
    variability. If Keshi Co wants to eliminate the risk of interest rate fluctuations completely, then it should borrow at the floating
    rate and swap it into a fixed rate.

    this is the answer given in acca website. it states that we should take floating rate and swap it with fixed rate.in our answer we have assumed that they want fixedrate ..can you pls explain

    October 25, 2020 at 9:35 am #593071
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Your first post is all fine.

    With regard to your second post, they will borrow floating but then swap so that the end result is that they are paying fixed interest.

  • Author
    Posts
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