A commercial bank has $ 200 million of floating-rate loans yielding the T-bill rate plus 2 percent.
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A commercial bank has $ 200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $ 200 million of fixed-rate deposits costing 9 percent. A savings bank has $ 200 million of mortgages with a fixed rate of 13 percent. They are financed with $ 200 million in CDs with a variable rate of T-bill rate plus 3 percent.
a. Discuss the type of interest rate risk each institution faces.
b. Propose a swap that would result in each institution having the same type of asset and liability cash flows.
c. Show that this swap would be acceptable to both parties.
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a The commercial bank is exposed to a decrease in rates that would lower interest income while the s...View the full answer
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Related Book For
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
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