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1. Metro Bank enters an FRA as a buyer with the following features: - Expiration/Settles in 180 days - The notional amount is $1 million.

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1. Metro Bank enters an FRA as a buyer with the following features: - Expiration/Settles in 180 days - The notional amount is $1 million. - Specifies a forward rate of 5% - The underlying interest rate is 90 days LIBOR. a) If in 180 days (at expiration) the 90 -day LIBOR is at 6%. Compute the cash settlement payment at expiration for Metro Bank. (7 marks) b) What if in 180 days (at expiration) the 90-day LIBOR is at 3.5%. Compute the cash settlement payment at expiration for Metro Bank. (7 marks) 2. Given a five-year municipal bond yielding 12%, a comparable five-year corporate bond yielding 15%, a federal income tax rate of 34% facing the bank, which bond should be preferred by the bank? (5 Marks) 3. Provide one good reason for using the banks investment portfolio to speculate on interest rate movements. Provide one reason against such a strategy. (6 marks)

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