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QUESTION 3 [15 Marks] Use this balance sheet information to answer the following questions: Financial Institution (FI) Balance Sheet (Amount in millions, Duration in years) Assets Amount Duration Liabilities Amount Duration Cash 150 Core Deposits 1250 0.75 yrs Treasury Bonds 450 CDs 750 1.25 yrs Loans (special) 650 Euro CDs Loans (variable) 750 Debentures 1500 Loans (fixed) 2500 Equity 250 1.95 yrs 1.25 yrs 2.75 yrs 3.25 yrs The variable loans are repriced every 180 days. The bank is considering approving a special loan with the following characteristics: The loan has repayments of $123.25 at the end of year 1, $575.25 at the end of year 4, $29.25 at the end of year 5 and $34.125 at the end of year 6. The loan is trading at par and the yield to maturity is 4.5 percent per annum. Select the loan that bank should approve. Please provide justification. Assume that both loans have similar default risk. The yield curve is flat, and the interest rate is 4.5%. The financial institution decides to use a 3-year swap. The swap is composed of a three-year bond with a fixed coupon rate of 4.5 percent paid annually and a floating-rate bond with duration of approximately zero. Using this swap, determine the notional principal of the swap and advise the financial institution on whether it should be a fixed or floating payer. Present an explanation including pertinent assumptions of how the swap you have recommended works