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

question 97

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.

What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the analysis?

• A)Variable-rate at LIBOR.
• B)Fixed-rate at 8 percent.
• C)Fixed-rate at 1 percent.
• D)Fixed-rate at 2 percent.

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Definitions:

Normal Distribution

A bell-shaped probability distribution that is symmetric about the mean, describing how continuous data is dispersed around the average value.

Standard Deviation

A gauge for determining the level of difference or scattering in a series of amounts.

Mean High Temperature

The average of the highest temperatures observed over a specified period.

Normal Distribution

A symmetric, bell-shaped distribution of values in which the mean, median, and mode are all equal and located at the center of the distribution.