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

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 3SBD

See similar textbooks

Similar questions

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 OE) $6
For a bank that funds its fixed-rate loans with floating rate deposits whose cost varies with a the 3-month LIBOR, it can magnify its strategic interest rate exposure by entering into a plain vanilla interest rate swap where it receives the fixed-rate and pay the floating rate. True False
A Credit Default Swap is structured like the one below for a protection of $100 million. If payments are made annually, what are the cash flows from A to B if there is a default after 2 years and 2 months and recovery rate is 40%? And what are the cash flows from B to A? 70 bps per year Default Default Protection Protection Buyer, A Seller, B Payoff if there is a default by reference entity=100(1-R)
A commercial bank is planning to offer Luna a loan in the amount of $15,000 and the bank figures that Luna will repay the loan in full with probability 0.79 and default otherwise. Also, Luna has asked for an interest rate of 12%. In order for the bank to be able to offer this rate, what is the collateral amount that Luna must offer the bank in the event of default? $8,177.5 $8,228.6 $8,366.9 $8,401.1
Jasper, Inc. is looking for a five-year term loan of $3 million. The firm will have to pay a premium of 1.5 percent for default risk to its bank and another 0.75 percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this bank loan? 9% 8.25% 9.75% None of the above
An insurance company makes long-term loans with variable interest rates. It funds the loans by issuing guaranteed investment contracts (GICS) that pay a fixed rate. The interest rate paid on loans is adjusted annually. The insurance company could hedge its interest rate risk by purchasing an interest rate swap where it pays a fixed rate of interest and receives a floating rate. O True O False
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million
1
At the present time one can enter five-year swaps that exchange LIBOR for 8%. An off-market swap would be defined as a swap of LIBOR for a rate other than 8%. For example, a firm with a 10% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 10%. What up-front payment will be required to induce a counterparty to take the other side of the swap? Assume a notional principal of $10million. Use 8% as discount rate for all horizons.
For an interest rate swap, if i have 7-year floating rate of 4% and a 7 year fixed rate of 5.4% and both loans are valued at 12 million. How do I find the value of the swap? NPV or PV.
A company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?
A bank sets the loan rate on a prospective loan at 14%. This consists of a 12% base rate and a 2% credit risk premium. It charges 1/8 of a percent loan origination fee to the borrower and imposes a 10% compensating balance requirement to be held as non-interest bearing demand deposits. It is also required to set aside reserves at a rate of 10% of deposits with the Federal Reserve. • What is the total return on this loan?