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Question
XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB. The spread of a BB rated benchmark bond is 2.5 percent over the U.S. Treasury bond of similar maturity. XYZ Bank sells a $20,000,000 one-year credit forward contract to IWILL Insurance Company. At maturity, the spread of the benchmark bond against the Treasury bond is 2.1 percent, and the benchmark bond has a modified duration of 4 years. What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?
A. The seller pays the buyer $320,000.
B. The buyer pays the seller $320,000.
C. The seller pays the buyer $80,000.
D. The buyer pays the seller $80,000.
E. The borrower receives $240,000.
Answer
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