An embedded option associated with each of the following instruments potentially alters the rate sensitivity of the underlying instrument. Indicate when the option is typically exercised and how it affects rate sensitivity. The current prime rate is 3.25 percent.
a. Fixed- rate mortgage loan with a yield of 5.5 percent and 30- year final maturity.
b. Time deposit with five years remaining to maturity; carries a fixed rate of 4 percent.
c. Commercial loan with a two- year maturity and a floating rate set at prime plus 2.5 percent. There is a cap of 6 percent representing the maximum rate that the bank can charge on the loan.

  • CreatedNovember 03, 2015
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