A Bank Buys an Interest Rate Floor in Conjunction with a Loan

question 42

Multiple Choice

A bank buys an interest rate floor in conjunction with a loan it holds that will make four semiannual payments starting six months from now.The floor has a strike of 9 percent.LIBOR at the beginning of the four payment periods is 10,11,8,and 8.6 percent.On which dates will the floor writer make a payment to the bank?

• A)now and in 24 months
• B)in 18 and 24 months
• C)in 12 and 18 months
• D)in 6,12,18 and 24 months
• E)none of the above

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Definitions:

Dividends Distributed

The total amount of dividends that have been given out to shareholders over a specified period.

Cumulative

Referring to the total amount accumulated over time, often used in the context of dividends, earnings, or effects that are added together continuously.

Nonparticipating

A term often used in insurance to describe policies that do not grant the policyholder dividends from the insurer's profits.

Dividends in Arrears

Unpaid dividends on cumulative preferred stock that must be paid out before any dividends can be distributed to common shareholders.