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 cost of funds for the thrift if the cash market liabilities are included in the analysis?
A)Variable-rate at LIBOR.
B)Fixed-rate at 8 percent.
C)Fixed-rate at 1 percent.
D)Fixed-rate at 2 percent.
E)None of the options.

Question

Quizplus · Accepted Answer

The thrift's original cost of funds is LIBOR + 2 percent. By entering into the swap, it pays 6 percent fixed and receives LIBOR, effectively changing its variable-rate liabilities into fixed-rate liabilities. The net cost of funds becomes 6 percent (from the swap) plus 2 percent (original spread over LIBOR), totaling 8 percent fixed.

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