The Bank of Orlando has large holding of 8% fixed-rate loans. The bank’s sources of funds cost on average LIBOR - 1%.
a) If LIBOR is currently at 5%, what spread is the bank earning?
b) If LIBOR increases to 7%, what is the new spread the bank is earning?
c) Assuming the bank decides to enter into an interest rate swap that allows the bank to receive LIBOR in exchange for paying a rate of 5% fixed, what is the spread now locked in at? Show you calculations.