Type of interest rate risk does financial institution face

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A commercial bank has $200 million of floating rate loans yielding the T-bill rate plus 2%. These loans are financed by $200 million of fixed-rate deposits costing 9%. A savings association has $200 million of mortgages with a fixed rate of 13%. The mortgages are financed by $200 million of CDs with a variable rate of T-bill plus 3%.

a) What type of interest rate risk does each financial institution face?

b) Describe a swap that would be advantageous for each financial institution.

c) Demonstrate how the swap arrangement (from part b) would be acceptable to both parties. (show cash inflow/outflow rates)

Reference no: EM13927791

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