The Six-Month LIBOR Rate for a Reference Period Is 7

question 74

Multiple Choice

The six-month LIBOR rate for a reference period is 7% (annualized) .The fixed six-month coupon rate for the same period is 4%.Compute the payment to the floating-rate payer if the notional principal is $200 million.

• A)$0.5 million
• B)$0.6 million
• C)$0.85 million
• D)$1 million
• E)$0.9 million

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Definitions:

Interest Rate Parity

A theory stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between those countries' currencies.

Covered Interest Arbitrage

An investment strategy that involves taking advantage of the interest rate differential between two countries while hedging against exchange rate risk.

Risk-Free Profits

Profits made through investment strategies that are supposed to incur no risk to the investor.

Interest Rate Parity

A financial theory stating that the difference in interest rates between two countries will be offset by changes in the exchange rate between their currencies.