Question
he lending division of AusBank originates a 5-year, $10 million loan and charges the borrower 5% p.a. Simultaneously, AusBanks funding division issues $10 million in
he lending division of AusBank originates a 5-year, $10 million loan and charges the borrower 5% p.a. Simultaneously, AusBanks funding division issues $10 million in 1-year CDs paying 2.5%. AusBank could have chosen to invest in 5-year Treasury Bonds paying 3.5% p.a., and investors could acquire 1-year treasury securities that pay 2%. Calculate the value in percent of the net interest margin and its 3 components or spreads.
Net Interest Margin:
Credit Spread:
Interest rate risk spread:
Funding spread:
Bank XYZ extended a $50 million, 10-year loan to a borrower and funded this by issuing a $50 million bond. The borrower pays 5% p.a. compounded monthly, while investors in the bond earn 2.3% p.a. compounded quarterly. What is the spread on this asset/liability pairing? Hint: Use the effective annual rate formula.
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