A Thrift Has Funded 10 Percent Fixed-Rate Assets with Variable-Rate

question 3

Multiple Choice

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two.What will be the net swap cash flow each year if the notional value of a swap is $100 million?

• A)The thrift pays $0.75 million to the bank in year one and receives $0.25 million from the bank in year two.
• B)The thrift receives $0.75 million from the bank in year one and pays $0.25 million to the bank in year two.
• C)The thrift pays $0.25 million to the bank in year one and receives $0.75 million from the bank in year two.
• D)The thrift receives $0.25 million from the bank in year one and pays $0.75 million to the bank in year two.

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Definitions:

Phospholipids

A type of lipid molecule that forms the main structure of cell membranes, composed of two fatty acids, a phosphate group, and a glycerol molecule.

Plasma Membrane

The lipid bilayer that encloses the cytoplasm of a cell, regulating the passage of substances in and out of the cell.

Protein Synthesis

A cellular process involving the assembly of amino acids into proteins based on the sequence of nucleotides in messenger RNA.

Photosynthesis

The process by which green plants and some other organisms use sunlight to synthesize foods from carbon dioxide and water.