Dhruvika Logistics has a Rs 400 crore bank loan at a floating 9.8% and can issue a five-year bond at a fixed 8.9%. Prepaying the loan costs 0.3%. Should it switch, and what risk changes?

Switch: the bond saves Rs 3.6 crore a year, repays the Rs 1.2 crore prepayment charge in about 4 months, and nets about Rs 16.8 crore over five years at today's rates. The risk changes shape: Dhruvika stops carrying the chance of rates rising and gives up the benefit if they fall. The switch loses only if the benchmark averages more than about 0.84 points below today's level.

Start with the arithmetic. 0.9 points on Rs 400 crore is Rs 3.6 crore a year. Against a one-off Rs 1.2 crore to exit the loan, the saving pays for itself in about 4 months and leaves about Rs 16.8 crore over five years if rates stay where they are. That condition, if rates stay where they are, is the part the interviewer wants you to find.

Think of choosing between a monthly phone plan whose price follows the market and a five-year contract at a fixed price. The contract protects you if prices rise and traps you if they fall. Moving from floating to fixed changes Dhruvika's rate exposure: it no longer suffers if the benchmark rises, and it no longer benefits if the benchmark falls. With the prepayment spread over five years, the bond costs about 8.96% all in. The floating loan beats that only if the benchmark averages below about 5.96%, a fall of about 0.84 points.

Three things worth naming. The bond repays Rs 400 crore in one go in year five, so Dhruvika swaps a loan it could repay gradually for a single large maturity it must refinance. Bond covenants are usually lighter than a bank's, which gives freedom but less early warning. And the bank loan could be prepaid if cash came in; the bond may be expensive to call. The view: switch, because the saving is large against the exit cost and rising rates would hurt a thin-margin trucking business more than falling rates would help it, and plan the year five refinancing from the start.