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A swap agreement calls for Durbin Industries to pay interest annually based on a rate of 1.5% over the oneyear T-bill rate currently 6%. In return Durbin receives interest at a rate of 6% on a fixed

A swap agreement calls for Durbin Industries to pay interest annually based on a rate of 1.5% over the oneyear T-bill rate, currently 6%. In return, Durbin receives interest at a rate of 6% on a fixed-rate basis. The notional principal for the swap is $50,000. What is Durbin’s net interest for the year after the agreement?

2. North-Northwest Bank (NNWB) has a differential advantage in issuing variable-rate mortgages, but does not want the interest income risk associated with such loans. The bank currently has a portfolio of $25,000,000 in mortgages with an APR of prime +150 basis points, reset monthly. Prime is currently 4%. An investment bank has arranged for NNWB to swap into a fixed interest payment of 6.5% on a notional amount of $25,000,000 in return for its variable interest income. If NNWB agrees to this, what interest is received and given in the first month? What if prime suddenly increased 200 basis points?

Jun 18 2020 View more View Less

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