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

question 9

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 2, LIBOR rates are 6 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?

• A)The U.S.bank paid $9 million and received $9 million for a net payment of $0 million.
• B)The U.S.bank paid $9 million and received $15 million for a net receipt of $6 million.
• C)The U.S.bank paid $12 million and received $9 million for a net payment of $3 million.
• D)The U.S.bank paid $12 million and received $12 million for a net payment of $0 million.
• E)The U.S.bank paid $12 million and received $15 million for a net receipt of $3 million.

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Definitions:

Common Fixed Expenses

Costs that do not vary with the level of production or sales over a certain period and are shared among different segments or products of the business.

Absorption Costing

This accounting approach incorporates every manufacturing expense, such as direct materials, direct labor, plus variable and fixed overhead costs, into the product's total cost.

Variable Costing

An accounting method that only includes variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs.

Product Costs

The costs directly associated with the creation of a product, encompassing direct materials, direct labor, and manufacturing overhead.