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QUESTION 8 Bank B lends 10 million for 5-year with annual interest payments at a fixed rate of 6%. In order to match the bank's liability cash flows (which rise and fall with interest rate), the bank's managers would prefer to receive variable interest payments. They enter a 5- year interest rate swap as the payer. The swap has a notional amount equal to the amount of the loan. The swap rate is calculated based on 1-year LIBOR (with no spread), and the LIBOR yield curve on the swap's inception date is as follows: LIBOR Maturity 1 0.040 2 0.046 3 0.049 4 0.051 0.052 5 If at time 1 (the beginning of the 2nd year) the LIBOR yield curve is unchanged from the above values, what net interest payment will the bank receive at time 2 from the combination of the loan and the swap? O a. 646,000 b.544,000 O c. 484,000 Od. 604,000 e. 706,000 QUESTION 8 Bank B lends 10 million for 5-year with annual interest payments at a fixed rate of 6%. In order to match the bank's liability cash flows (which rise and fall with interest rate), the bank's managers would prefer to receive variable interest payments. They enter a 5- year interest rate swap as the payer. The swap has a notional amount equal to the amount of the loan. The swap rate is calculated based on 1-year LIBOR (with no spread), and the LIBOR yield curve on the swap's inception date is as follows: LIBOR Maturity 1 0.040 2 0.046 3 0.049 4 0.051 0.052 5 If at time 1 (the beginning of the 2nd year) the LIBOR yield curve is unchanged from the above values, what net interest payment will the bank receive at time 2 from the combination of the loan and the swap? O a. 646,000 b.544,000 O c. 484,000 Od. 604,000 e. 706,000

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