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 above.

Question

Quizplus · Accepted Answer

The thrift will receive LIBOR + 2 percent on its assets and pay 6 percent on its liabilities, resulting in a net yield of 6 percent - 2 percent = 4 percent. The swap will convert the thrift's variable-rate assets into fixed-rate assets at 6 percent, resulting in a net after-swap yield on assets of 6 percent.

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