XYZ Bank Lends $20,000,000 to ABC Corporation Which Has a Credit

question 95

Multiple Choice

XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB.The spread of a BB rated benchmark bond is 2.5 percent over the U.S.Treasury bond of similar maturity.XYZ Bank sells a $20,000,000 one-year credit forward contract to IWILL Insurance Company.At maturity, the spread of the benchmark bond against the Treasury bond is 2.1 percent, and the benchmark bond has a modified duration of 4 years.What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?

• A)The seller pays the buyer $320,000.
• B)The buyer pays the seller $320,000.
• C)The seller pays the buyer $80,000.
• D)The buyer pays the seller $80,000.
• E)The borrower receives $240,000.

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