A company has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 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 percent. The company 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. Briefly discuss your results.
a. What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the analysis?
b. What will be the net after-swap yield on assets for the bank?
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The net after-swap cost of funds for the bank if the cash market liabilities are included in the analysis is determined with the use of following table:
|Cash Outflow from Balance Sheet||-(LIBOR + 2%)||-6%|
|Cash Inflow from Swap||6%||+LIBOR|
|Cash Outflow from Swap||-LIBOR||-6%|
|Net Cash Flow||8%||LIBOR|
The net after swap yield on assets for the bank is FIXED ASSET AT 1 %.
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