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.
E)The borrower receives $240,000.

Question

Quizplus · Accepted Answer

The payment is calculated as the change in spread (0.4%) multiplied by the notional amount ($20,000,000) and the modified duration (4 years), resulting in $320,000. Since the spread decreased, the seller pays the buyer.

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