USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 21

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market:

-Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the first quarter?

• A) $35,250.00
• B) $36,375.00
• C) $38,250.00
• D) $40,500.00
• E) $0

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Definitions:

Residual Income

Earnings that exceed the minimum required return on a company's operating assets, demonstrating the excess of net operating income over its cost of capital.

Net Profit

The real income remaining after deducting operating costs that aren't considered in determining gross profit.

Invested Capital

The total amount of money that has been invested into a company by its owners, shareholders, and creditors, used for acquiring assets and funding operations.

Investment Turnover

A financial ratio that measures the efficiency of a company's use of its investments in generating sales revenue.