24-91 at the End of Year 3,LIBOR Rates Are 6

question 32

Multiple Choice

24-91 At the end of year 3,LIBOR rates are 6 percent and the exchange rate is $1.10/£.What is the net payment paid or received in dollars by the U.S.bank?

• A)The U.S.bank paid $12 million and received $16.5 million for a net receipt of $4.5 million.
• B)The U.S.bank paid $12 million and received $11 million for a net payment of $1 million.
• C)The U.S.bank paid $12 million and received $12 million for a net payment of $0 million.
• D)The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million.
• E)The U.S.bank paid $9 million and received $12 million for a net receipt of $3 million.

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Definitions:

Market Risk Premium

The additional return expected by an investor for holding a risky market portfolio instead of risk-free assets.

Risk-Free Rate

The hypothetical yield on a risk-free investment, often exemplified by state-issued bonds.

Cost Of Equity

The return that a company must offer investors to compensate for the risk of investing in its shares.