Bank XYZ extended a $50 million, 10-year loan to a borrower and funded this by issuing a
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Question:
Bank XYZ extended a $50 million, 10-year loan to a borrower and funded this by issuing a $50 million bond. The borrower pays 5.5% p.a. compounded monthly, while investors in the bond earn 2.6% p.a. compounded semi-annually. What is the spread on this asset/liability pairing? Hint: Use the effective annual rate formula.
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