A commercial bank has $200 million in floating rate loans that yield a T-bill more than 2%. These loans are financed with 200 million dollars of deposits to

fixed rate that costs 9%.

A savings association has $200 million in mortgages with a fixed rate of 13%. Mortgages are financed with $200 million in T-bill variable rate CDs

more than 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 agreement (from part b) would be acceptable to both parties.

(show cash in/out rates)