1. Suppose that Florida Bank has recently granted a loan of $2 million to Oyster Farms at
LIBOR plus 0.5 percent for six months. In return for granting Oyster Farms an interest-
rate cap of 6.5 percent on its loan, this bank has received from this customer a floor rate on
the loan of 5 percent. Suppose that, as the loan is about to start, LIBOR declines to 4.25
percent and remains there for the duration of the loan. How much (in dollars) will Oyster
Farms have to pay in total interest on this six-month loan with floor and without floor?
How much in interest rebates will Oyster Farms have to pay due to the fall in LIBOR?
2. What does securitization of assets mean?
3. What kinds of assets are most amenable to the securitization process?
4. What advantages does securitization offer to the lending institutions?
5. What was the motivation for creating collateralized mortgage obligations (CMOs) and
why is the creation of CMOs important for the market and/or investors?
6. What is a credit swap? For what kinds of situations was it developed?
7. Why is a credit default swap (CDS) useful?
8. What are the differences between a CDS contract and a conventional insurance contract?