Product Detail

Business loans are a primary source of capital for most companies. The rate of interest payable on a business loan may be either fixed rate or variable rate. In either case, a business loan exposes the borrower to the risk of adverse movements of market interest rates.

Variable Rate

If the market interest rate rises during the term of the loan, so does the borrowing cost.

Fixed Rate

If the market interest rate declines during the term of the loan, a company's actual borrowing cost rises due to the effect of market benchmarking.

An interest rate risk management tool enables a company to efficiently manage its interest rate cost and improve its financial planning.

There are multiple interest rate risk management tools. For example:

Allows borrower to convert the loan's type of
interest rate to manage the loan's cost efficiently


Allows borrower to hedge against rising
interest rates within a set limit
(Interest Rate Swap)
(Cap)

Variable Rate to Fixed Rate

Fixed Rate to Variable Rate

A company that has borrowed at a variable rate and that expects rates to rise can purchase a cap, which functions as insurance against higher interest costs up to the insured rate level.

The borrower expects interest rates to rise and attempts to reduce cost by locking in the current rate.

The borrower expects interest rates to fall and so converts a loan to variable rate in order to reduce cost.

Advantage

Opportunity to reduce interest burden

Advantage

Highly flexible, allowing client to choose whether to acquire the right for interest rate risk protection or not.

Limitation

Potential loss if reference rate falls in the future

Limitation
Potential loss if reference rate increases in the future
Limitation
Client must pay a set fee, due upon signing of contract

Remark:

Client may choose an interest rate swap without terminating the existing loan contract.

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