SELF is presently having to pay the best rate on its line of credit in the banks. Because the information is exhibit 6 signifies, the best lending rates are variable and changes across time. SELF aims to supply fixed interest rate financial loans to the clients included in its new loan structure. The dwelling could cause an issue since the rate where the organization pays its obligations is floating as the rate where it receives the obligations is going to be fixed. The problem can get particularly dangerous once the floating rate increases because the organization is going to be needed to pay for a greater rate on its obligation while finding the same fixed interest rate on its obligations. Therefore, it's important for SELF to transform its floating rate interest obligations to be able to match its obligations against its earnings. Using derivative transactions, the organization can effectively turn its floating rate interest obligations into fixed-rate obligations. Such obligations won't be impacted by alterations in rate of interest and will also be synchronized with interest inflows of the organization.Excel Calculations Questions Covered
How can SELF turn its floating-rate financing into fixed-rate financing? At what rate students should be charged for the new loan?
How should SELF deal with the prepayment problem? What is the impact of prepayment problem on the rate charged to students?