27. A banker commits to a two-year $5,000,000 com- mercial loan and expects to fulfill the agreement

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27. A banker commits to a two-year $5,000,000 com- mercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such loans. To hedge against rates falling, the banker buys a 30- day interest-rate floor with a floor rate of 7.5% on a notional amount of $10,000,000. After 30 days, actual rates fall to 7.2%. What is the expected interest income from the loan each year? How much did the option pay?

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Financial Markets and Institutions

ISBN: 978-0321280299

5th edition

Authors: Frederic S. Mishkin, Stanley G. Eakins

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