A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap yield on assets for the bank?
A)Variable-rate at LIBOR.
B)Fixed-rate at 8 percent.
C)Fixed-rate at 1 percent.
D)Fixed-rate at 2 percent.

Question

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap yield on assets for the bank?

What will be the net after-swap yield on assets for the bank?
A)Variable-rate at LIBOR.
B)Fixed-rate at 8 percent.
C)Fixed-rate at 1 percent.
D)Fixed-rate at 2 percent.

Quizplus · Accepted Answer

The bank will receive LIBOR + 1 percent on its variable rate asset,and has locked-in variable funding costs through the swap at LIBOR.The net swap yield (LIBOR + 1 - LIBOR)= 1 percent.

A Thrift Has Funded 10 Percent Fixed-Rate Assets with Variable-Rate