Reference no: EM132661425

MSIL Company was paying interest on debt at fixed rates but believed that market interest rates would fall in future. It entered into a three-year interest swap on 01-July-2020 in which the company agreed to pay to City Bank interest equal to the MIBOR rate + 2% (200 basis points per annum] on a notional principal of INR 2000,000, and in return the bank agreed to pay the company interest at a fixed rate of 8% per annum on the same notional principal amount.

• The payments are to be exchanged every six months (January & July) beginning 01-Jan-21. On each payment date, the floating rate payments are calculated using the MIBOR rate prevailing six months before the payment date. On each payment date, one side would remit the difference between the two payments to the other side.

REQUIRED:

Problem a. Calculate six-monthly 'receive fixed/pay floating' interest cash flows for MSIL Company if the applicable MIBOR moved as follows:

Date               MIBOR %  (Annualized)
01-Jul-20               7.00%
01-Jan-21                6.60%
01-Jul-21                 6.10%
01-Jan-22                5.50%
01-Jul-22                   4.90%
01-Jan-23                 4.10%
01-Jul-23                  3.90%

Problem b. Calculate the net gain/loss for each six-month period and the aggregate gain/loss to the company on account of the above interest rate swap.

Problem c. Assuming you are the finance manager of the company, discuss the pros & cons of such interest swap agreements.