Question

A company has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 percent....

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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Answer:

1)

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:

Thrift Bank
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
Variable Rate LIBOR
Fixed Rate 8%

2)

The net after swap yield on assets for the bank is FIXED ASSET AT 1 %.

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