Miami Mutual Bank* purchases a two-year interest rate cap for a fee of 3 percent of...

Miami Mutual Bank* purchases a two-year interest rate cap for a fee of 3 percent of notional principal valued at $10 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. At the same time, Miami Mutual sells a two-year floor (8 percent) for a fee of 2 percent of the $10 million principal. Assume that LIBOR is expected to be 7 percent and 14 percent at the end of each of the next two years, respectively. What is this type of strategy called? Also what do dollar amount do Miami Mutual Bank stand to gain or lose from this strategy?

Expert Solution

jeff jeffy answered 1 year ago

12. A bank enters into an interest rate cap with a ceiling of 12%. The notional...

12. A bank enters into an interest rate cap with a ceiling of 12%. The notional principal is $50 million, and LIBOR is the index used to represent current interest rates. What is the first year's payment if LIBOR is 9%? A. Bank pays $1.5 million. B. Bank receives $1.5 million. C. $0. D. Bank receives $3million.

A bank purchases a six-month $4 million Eurodollar deposit at an interest rate of 7.6 percent...

A bank purchases a six-month $4 million Eurodollar deposit at an interest rate of 7.6 percent per year. It invests the funds in a six-month Swedish krona bond paying 8.6 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.1800/SKr. a. The six-month forward rate on the Swedish krona is being quoted at $0.1810/SKr. What is the net spread earned for six months on this investment if the bank covers its foreign exchange exposure using...

Assume that the interest rate on a one-year Treasury bill is 5.4 percent and the rate on a two-year Treasury note is 9.0 percent.

Assume that the interest rate on a one-year Treasury bill is 5.4 percent and the rate on a two-year Treasury note is 9.0 percent.(a)If the expected real rate of interest is 2.4 percent, determine the inflation premium on the Treasury bill. (Round answer to 1 decimal place, e.g. 527.5.)(b) Using the expected real rate of interest from Part A, if the maturity risk premium is expected to be zero, determine the inflation premium on the Treasury note. (Round answer to...

Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 15.9 percent, and the current rate on a 3-year bond is 13.9 percent.

Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 15.9 percent, and the current rate on a 3-year bond is 13.9 percent. If the expectations theory of the term structure is correct, what is the difference between the 1-year interest rate expected during Year 3 and the current one year rate?

How is the premium of an interest rate cap calculated?

5. QRS Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank...

5. QRS Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model? Briefly discuss.

Assuming that the current interest rate is 3 percent, compute the present value of a five-year,...

Assuming that the current interest rate is 3 percent, compute the present value of a five-year, 5 percent coupon bond with a face value of $1,000. What happens when the interest rate goes to 4 percent? What happens when the interest rate goes to 2 percent? Instructions: Enter your responses rounded to the nearest penny (two decimal places). PV at an interest rate of 3% = $ PV at an interest rate of 4% = $ The present value (Click to...

Suppose that the annual interest rate is 3 percent in the United States and 4 percent...

Suppose that the annual interest rate is 3 percent in the United States and 4 percent in Germany, and that the S(EUR/USD) = $1.60 and the forward exchange rate, with one-year maturity, is F12(EUR/USD ) = $1.57. Assume that an arbitrager can borrow up to $10,000,000 or €6,250,000. If an astute trader finds an arbitrage opportunity, what is the net cash flow in one year? (Show each step and the values)

Given a 3 percent interest rate, compute the year 6 future value of deposits made in...

Given a 3 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,700, $1,900, $1,900, and $2,200, respectively.

1. If a bank invested $67 million in a two-year asset paying 12 percent interest per...

1. If a bank invested $67 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $67 million one-year liability paying 9 percent interest per year, what would be the impact on the bank’s net interest income if, at the end of the first year, all interest rates increased by 2 percentage point? (Input the amount as a positive value. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places....

Question