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:

D-Gulose

An aldohexose sugar in the D-configuration, a stereoisomer of glucose with a specific arrangement of hydroxyl groups.

L-Gulose

A rare sugar, an isomer of glucose, not commonly found in nature.

Fischer Projection

A two-dimensional representation of a three-dimensional organic molecule by projection, used to depict stereoisomers.

Fischer Projection

A two-dimensional representation of a molecule's structure to display chirality by projecting asymmetric carbon atoms.