A USBank Agrees to a Swap of Making Fixed-Rate Interest Payments

question 73

Multiple Choice

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of year 3, LIBOR rates are 6 percent and the exchange rate is $1.10/£.What is the net payment paid or received in dollars by the U.S.bank?

• A)The U.S.bank paid $12 million and received $16.5 million for a net receipt of $4.5 million.
• B)The U.S.bank paid $12 million and received $11 million for a net payment of $1 million.
• C)The U.S.bank paid $12 million and received $12 million for a net payment of $0 million.
• D)The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million.
• E)The U.S.bank paid $9 million and received $12 million for a net receipt of $3 million.

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Definitions:

Samuel Adams

An American statesman, political philosopher, and one of the Founding Fathers of the United States, known for his role in the American Revolution.

Paul Revere

An American silversmith, engraver, early industrialist, and a Patriot in the American Revolution, best known for his midnight ride to alert the colonial militia of the approaching British forces.

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A confrontation on March 5, 1770, in which British soldiers killed five civilian men in Boston, escalating tensions that led to the American Revolutionary War.

British Soldiers

Members of the United Kingdom's military service historically involved in various global conflicts and peacekeeping missions.