What are some of the practical difficulties in arranging

Reference no: EM133325592

Case: A commercial bank has $200 million of four-year maturity floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of four-year maturity fixed-rate deposits costing 9 percent. The commercial bank can issue four-year variable-rate deposits at the T-bill rate plus 1.5 percent. A savings bank has $200 million of four-year maturity mortgages with a fixed rate of 13 percent. They are financed with $200 million in four-year maturity CDs with a variable rate of the T-bill rate plus 3 percent. The savings bank can issue four-year long-term debt at 12.5 percent.

Question 1: Discuss the type of interest rate risk each FI faces.

Question 2: Propose a swap that would result in each FI having the same type of asset and liability cash flows. End of Year T-Bill Rate 1. 1.75% 2. 2.00 3. 2.25 4. 2.50

Question 3: Show that this swap would be acceptable to both parties.

Question 4: The realized T-bill rates over the four-year contract period are as follows: Calculate the realized cash flows on the swap and the net interest yield for the savings bank and the commercial bank over the contract period.

Question 5: What are some of the practical difficulties in arranging this swap?

Reference no: EM133325592

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