XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB.The spread of a BB rated benchmark bond is 2.5 percent over the U.S.Treasury bond of similar maturity.XYZ Bank sells a $20,000,000 one-year credit forward contract to IWILL Insurance Company.At maturity,the spread of the benchmark bond against the Treasury bond is 2.1 percent,and the benchmark bond has a modified duration of 4 years.What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?
A)The seller pays the buyer $320,000.
B)The buyer pays the seller $320,000.
C)The seller pays the buyer $80,000.
D)The buyer pays the seller $80,000.

Question

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The change in the market value of the loan increased due to the decrease in interest rates.
Since rates fell and the loan value increased,the seller (XYZ)bank pays the buyer (IWILL Insurance)the amount of the increase in loan value ($320,000).

XYZ Bank Lends $20,000,000 to ABC Corporation Which Has a Credit