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 bank?
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 bank's variable-rate assets earn LIBOR + 1 (L + 1) percent. After the swap, the bank will receive LIBOR from the thrift and pay 6 percent to the thrift. So, the bank's net after-swap yield on assets will be LIBOR - 6 percent, which is equal to 1 percent.

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