Suppose that a savings and loan association buys an interest-rate cap that has these terms: The reference rate is the 6-month Treasury bill rate; the cap will last for five years; payment is semiannual; the strike rate is 5.5%; and the notional amount is $10 million. Suppose further that at the end of a 6-month period, the 6-month Treasury bill rate is 6.1%.
Answer the below questions.
(a) What is the amount of the payment that the savings and loan association will receive?
(b) What would the writer of this cap pay if the 6-month Treasury rate were 5.45% instead of 6.1%?

  • CreatedAugust 22, 2015
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