A Credit Union Has Funded 10 Percent Fixed-Rate Assets with Variable-Rate

Multiple Choice

A credit union has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent. A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent. The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent. The credit union and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two. What will be the net swap cash flow each year if the notional value of a swap is $100 million?

A) The credit union pays $0.75 million to the bank in year one and receives $0.25 million from the bank in year two.
B) The credit union receives $0.75 million from the bank in year one and pays $0.25 million to the bank in year two.
C) The credit union pays $0.25 million to the bank in year one and receives $0.75 million from the bank in year two.
D) The credit union receives $0.25 million from the bank in year one and pays $0.75 million to the bank in year two.
E) None of these.