Hebert National Bank has a large number of 30-year mortgages with fixed interest rates. Hebert National Bank obtains its funds by continuously issuing 3-year certificates of deposit.

Assume that the current yield curve is sharply upward sloping.

Based on this information, explain how Hebert National Bank is exposed to interest rate risk. Is the steep upward sloping yield curve good news or bad news for HNB? Why?

While the current yield curve is sharply upward sloping, Jenny Hebert, the CEO of Hebert National Bank, is concerned about the yield curve flattening and she wants to hedge the balance sheet against that possibility. What should Jenny consider as she decides how to hedge this risk?