Chameleon Ltd has a fixed interest rate borrowing of $1 million at 10% p.a.for five years and wishes to swap to a floating rate loan.In the swap,Chameleon pays the fixed interest payment of $100 000 on the loan and the final balloon payment.It agrees to pay a financial intermediary a variable amount at the bank-accepted bill interest rate on the $1 million and the financial intermediary pays Chameleon a fixed rate of 10% p.a.What is the result of this swap by Chameleon?
A)Chameleon has effectively borrowed $1 million at the bank-accepted bill rate.
B)Chameleon has effectively borrowed $1 million at the fixed interest rate.
C)Chameleon has effectively borrowed $100 000 at the bank-accepted bill rate.
D)Chameleon has effectively borrowed $100 000 at the fixed interest rate.

Question

Quizplus · Accepted Answer

By entering into the swap, Chameleon has effectively converted their fixed rate borrowing into a floating rate borrowing at the bank-accepted bill interest rate, which is the variable amount they agreed to pay the financial intermediary. Therefore, they have effectively borrowed $1 million at the bank-accepted bill rate.

Chameleon Ltd Has a Fixed Interest Rate Borrowing of $1