Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points. Question: Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.
Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points. Question: Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 14P
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Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points.
Question:
Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.
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