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 thrift?
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

Before the swap, the thrift's net yield on assets is: 
10% - (L + 2)% = 8% - L%
After the swap, the thrift will receive a fixed rate of 6% and pay a variable rate of L + 2%.
The net yield on assets after the swap will be:
10% - (6% + L + 2%) = 2% - L%
Therefore, the thrift will benefit from this swap if L is greater than 2%, which is likely since the bank's variable-rate assets earn L + 1%. The net after-swap yield on assets for the thrift will be a fixed rate at 2 percent.

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