Exhibit 14-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 64

Multiple Choice

Exhibit 14-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000, and the settlement is every 6 months. Assume a 360 day year.
-Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 7.8%.

• A) $0.00
• B) $25,000.00
• C) $50,000.00
• D) -$25,000.00
• E) -$50,000.00

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Definitions:

Issue Price

The price at which new or existing securities are offered for sale to the public or an individual.

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its stock price, often used by investors to assess the income-generating potential of an investment.

Cash Dividends Per Share

A measure of the amount of cash dividends paid out to shareholders per share of common stock.

Market Price

The price point at which a service or asset is currently available for trading within a market.