Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points. Question: Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.

Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points. Question: Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

See similar textbooks

Similar questions

Assume Credins Bank made a €10 million, 1-year discount loan at 7% interest, requiring a compensating balance equal to 10% of the face value of the loan. Determine the effective annual rate associated with this loan. (Note: Assume that the firm currently maintains €0 on deposit in Credins Bank.)
A customer asks a bank if it would be willing to commit to making the customer a one-year loan at an interest rate of 6.5% two years from now. To compensate for the costs of making the loan, the bank needs to charge two percentage points more than the expected interest rate on a Treasury bond with the same maturity if it is to make a profit. The bank estimates the liquidity (term) premium for one-, two-, and three-year bond to be 0%, 0.5%, and 1%, respectively. According to the Treasury yield curve below, what interest rate the loan must charge in order for the bank to make a profit on the loan? Should the manager be willing to make the commitment? Choose the closest answer below. Spot rate 6% 5% 4% Term 1-year 2-year 3-year O 7%; Yes O 8%; No O 5%: Yes O 6%; Yes O 7%; No
1. Companies A and B have been offered the following rates per annum on a $50 million five-year loan: Company A Company B Fixed rate 4.0% 5.2% Floating rate SOFR+0.2% SOFR+0.6% Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a financial institute, acting as intermediary, 0.2% per annum and that will appear equally attractive to both companies.
A bank sets the loan rate on a prospective loan at 14%. This consists of a 12% base rate and a 2% credit risk premium. It charges 1/8 of a percent loan origination fee to the borrower and imposes a 10% compensating balance requirement to be held as non-interest bearing demand deposits. It is also required to set aside reserves at a rate of 10% of deposits with the Federal Reserve. • What is the total return on this loan?
A Financial Institution (FI) originates a pool of 500 30-year mortgages, each averaging $150,000 with an annual mortgage coupon rate of 8 percent. Assume that the entire mortgage portfolio is securitized to be sold as GNMA pass-throughs. The GNMA credit risk insurance fee is 6 basis points, and the FI's servicing fee is 19 basis points. Assume no prepayments. What are the expected monthly cash flows (fees) for the GNMA? $2,947.83 $4,527.72 $13,014.25 $3,123.42 $8,973.62
A 167 day simple interest loan for $10,456 has a maturity value of $10,961. What is the simple interest rate and the equivalent bank discount rate? Use Banker's Rule
A firm has obtained a 3-year floating rate loan paying a premium of 2%. Given the prime rate is 5%. Immediately after the loan is taken, the prime rate increases to 6%. Which of the following is TRUE? Question 49 options: 1) The interest rate payable is 3%. 2) The interest rate payable is 5%. 3) The interest rate payable is 7%. 4) The interest rate payable is 8%.
A certificate of deposit (CD) is an agreement between a bank and a saver in which the bank guarantees an interest rate and the saver commits to leaving his or her deposit in the account for an agreed-upon period of time. National Trust Savings offers five-year CDs at 8.33% compounded daily, and Bank of the Future offers five-year CDs at 8.36% compounded annually. Compute the annual yield for each institution. (Round your answers to two decimal places.) NTS BF %
Data Back-Up Systems has obtained a $29,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.) a. How much interest (in dollars) will the firm pay on the 90-day loan? b. Find the 90-day rate on the loan. c. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstances. Answers a. The amount of interest on the loan is $___. (Round to the nearest cent.) b. The effective 90-day rate is___%. (Round to two decimal places.) c. The effective annual rate is___%. (Round to two decimal places.)
Assume a 3/1 floating rate mortgage for $700,000 has an initial rate of 1.75%. The loan resets with a margin of 200 basis points applied to the one-year treasury rate upon reset. At the end of the initial three year period, the one-year Treasury is 1.50%. At the end of four years, the one-year Treasury is 2.00%. 9. What is the payment commencing in month 49? 10. What is the loan balance at the end of 60 months?
Give typing answer with explanation and conclusion A bank sells a “three against six” $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 5.41 percent. There are actually 92 days in the three-month FRA period. Assume that three months from today the settlement rate is 4.92 percent. Determine how much the FRA is worth. (report postive amount, with cents)
ABC Company enters into an IRG arrangement with Ch-bank for a 9 months, P800,000 loan starting 3 months from now. The IRG rate is at 11% and the bank quotes a premium of P4,000. Compute for the effective interest rate if the actual interest rate 3 months from now is 8% . Show your solution.