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

---

Definitions:

Negotiable Instrument

A written document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payee’s name on it.

Negotiate

The process of discussing something with another party to reach a mutually agreeable decision or deal.

Nonnegotiable

Refers to instruments or documents that cannot be transferred or assigned from one party to another by endorsement or delivery, limiting their exchangeability.

Additional Terms

Supplementary conditions or provisions added to a contract that were not mentioned in the original agreement but are negotiated before finalization.