A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans today with $100 in 1-year CDs that currently have a 7% annual interest rate. It has the option of entering an interest rate swap contract. The contract includes a variable rate of 4.5% and a fixed rate of 7.5%. If the bank chooses to hedge its interest rate risk using a $100 notional value swap contract, what is the bank's expected net interest income in the first year if all interest rates remain the same throughout the year? A) $9 B) 12 OC) $7 OD) $16 E) $6
A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans today with $100 in 1-year CDs that currently have a 7% annual interest rate. It has the option of entering an interest rate swap contract. The contract includes a variable rate of 4.5% and a fixed rate of 7.5%. If the bank chooses to hedge its interest rate risk using a $100 notional value swap contract, what is the bank's expected net interest income in the first year if all interest rates remain the same throughout the year? A) $9 B) 12 OC) $7 OD) $16 E) $6
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It
funds the loans today with $100 in 1-year CDs that currently have a 7% annual
interest rate. It has the option of entering an interest rate swap contract. The
contract includes a variable rate of 4.5% and a fixed rate of 7.5%. If the bank chooses
to hedge its interest rate risk using a $100 notional value swap contract, what is the
bank's expected net interest income in the first year if all interest rates remain the
same throughout the year?
A) $9
OB) 12
OC) $7
OD) $16
O E) $6
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