21. Answer the following questions regarding interest rate swap. Show your work for partial credits (20 points). M&T Bank has $100 million of 5-year maturity mortgage loans with a fixed rate of 12%. They are financed with $100 million of 5-year maturity bonds with a variable rate of the LIBOR plus 4%. Suppose M&T Bank can issue 5-year long-term bonds for financing at the fixed rate of 11.5%

Morgan Stanley (MS) has $100 million of 5-year maturity floating-rate loans yielding the LIBOR plus 4%. These loans are financed with $100 million of 5-year maturity fixed-rate CDs costing 8%. MS can issue 5-year variable-rate deposits for financing at LIBOR plus 3.5%.

(2) Propose a swap that would result in each bank having the same type of asset and liability cash flows. Calculate the net interest yield for each bank after the swap.

(3) Had each bank gone to the debt market for financing, MS would pay LIBOR plus 3.5%, and M&T Bank fixed 11.5%. What are the savings of net interest yield for each bank through the interest rate swap?

(4) The realized LIBOR rates over the five-year contract period are as follows: End of Year 1 2 3 4 5 LIBOR Rate 3.75% 4.00 4.25 4.50 4.75 Calculate each year's net payment made by M&T Bank over the contract period.