Hedge and a cash flow hedge, Financial Accounting

PC Bank has $100,000 in fixed rate loans paying an annual interest rate of 10 percent, payable semiannually. PC Bank also has $100,000 in certificates of deposit. Their depositors demand the market rate of interest, whatever that may be. The market rate for certificates of deposit is prime less 2 percent. Currently, January 1, 2008 prime stands at 8 percent. PC Bank is satisfied with the current spread, i.e., the difference between the rate it receives and pays out, but worries that the spread could diminish if interest rates rose.

The Cybernet Bank is similarly worried. They too currently have a comfortable spread. In particular, they also currently receive 10 percent on their $100,000 variable rate loans (paying prime + 2 percent) and pay their depositors a fixed rate of 6 percent. Their certificates of deposit with a book value of $100,000 are fixed for 10 years. In contrast to PC Bank, The Cybernet Bank is concerned that interest rates will fall, eating into their comfortable spread.

Required:

i. PC Bank and the Cybernet Bank decide that they can both be better off by swapping their loan coupon payments. Explain why this is the case.

ii. Assume PC Bank and the Cybernet Bank sign a 10-year swap agreement on January 1, 2008, with settlement occurring on June 30 and December 31 of each year. In addition, assume that Cybernet adopted the FASB's Fair Value Option standard (SFAS-159), and decided to mark its certificates of deposit to market, and to show any gains/losses on its derivatives in income. If prime falls to 6 percent on July 1, 2008, for each bank, show the journal entries corresponding only to the swap agreement (including net settlement) for the following dates.

• January 1, 2008
• June 30, 2008

Assume the fair value of the swap agreement on June 30, 2008 is $3,000, reflecting the market's expectation of the present value of difference in future cash flows arising from the swap. Make sure to indicate which bank accounts for the derivative contract as a fair value hedge and a cash flow hedge.

Posted Date: 3/26/2013 1:48:09 AM | Location : United States







Related Discussions:- Hedge and a cash flow hedge, Assignment Help, Ask Question on Hedge and a cash flow hedge, Get Answer, Expert's Help, Hedge and a cash flow hedge Discussions

Write discussion on Hedge and a cash flow hedge
Your posts are moderated
Related Questions
Profitability Ratios - These ratios include the Gross profit Margin, Net profit Margin, Operating Margin, Return on Equity (ROE), and Return on Total Assets. These ratios helps t

Conny Duffy started working for Dexter Company on Thursday and 9 hours on Frida. Her annual salary is $80,000 and she is exempt white-collar employee. Determine her gross pay for h

The current balance sheet of CBKH shows $800 million of corporate loans ($500 million of which being rated AA- and the remaining rated BBB+), $200 million of bonds issued by an OEC

Explain:- Q.1 Explain the ways in which the needs of internal and external users of accounting information are the same and different. Q.2 Why is it important for financial sta

Calculate the Return on Sales and Asset Turnover 1. Complete a trend analysis for the items below for the last three years using the earliest year as the base year. Cash

Wilson Wonders's bonds have 15 years remaining to maturity. Interest is paid yearly, the bonds have a $1,000 par value, and the coupon interest rate is 12%. The bonds sell at a pri

State the term - Regulations Financial accounting reports, for numerous businesses, are subject to accounting regulations which try to make sure they are produced with standard

define law including contract and bankruptcy

COMMITTEE OF INSPECTION Appointment : A committee of inspection may be appointed by the creditors at their first or any subsequent meeting to supervise the trustee.

Table on subsequent page lists 21 ratios being calculated by the Bombay Stock Exchange. Tick the board class to that each of the 21 ratios belongs to the blank columns of the Table