A bank buys an interest rate floor in conjunction with a loan it holds that will make four semiannual payments starting six months from now.The floor has a strike of 9 percent.LIBOR at the beginning of the four payment periods is 10,11,8,and 8.6 percent.On which dates will the floor writer make a payment to the bank?
A)now and in 24 months
B)in 18 and 24 months
C)in 12 and 18 months
D)in 6,12,18 and 24 months
E)none of the above

Question

Quizplus · Accepted Answer

The floor writer will make a payment to the bank when LIBOR is below the strike rate of 9 percent. This occurs in the third and fourth periods when LIBOR is 8 and 8.6 percent, respectively, corresponding to 18 and 24 months from now.

A Bank Buys an Interest Rate Floor in Conjunction with a Loan