bond quiz false

NakedPuts

A is offering to lend at a floating rate of LIBOR plus 150 basis points, reset every six
months, with a maximum allowable increase of 300 basis points over the initial lending rate, for the life of the loan. B tells the way to deal with risk
how to deal Cap Risk: Issue floating rate CDs that cannot be withdrawn prior to maturity.
Floating rate CDs would eliminate cap risk.

true or false

NakedPuts00

False. CD's are liability, if the CD's don't have a cap then you now have an asset (the lending) that is capped at 450bps over and you could pay out significantly more on the CDs.

You have created cap risk. The risk that assets have a cap and liabilities do not.

Fixed rates CD's that can't be withdrawn would counteract this.



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 03:57PM by Paraguay.