Two different banks can get loans according to the following table. Assume the Fed Funds Rate starts at 4%.

	Fixed Rate	Floating Rate
Bank A	10%	5% + Fed Rate
Bank B	8%	4% + Fed Rate

Which bank has better credit? (please write 'A' or 'B')

What edge does the stronger bank have over the weaker bank when it comes to borrowing in the fixed market?

Suppose that the stronger credit bank wants to end up with a variable-rate liability, and the weaker credit bank wants to end up with a fixed-rate liability. Both banks are going to borrow $10,000,000 each. If they borrow from their respective markets and do NOT do an interest rate swap, what annual interest (in $) paid on the loans for both banks combined?

Suppose instead that each bank borrows in the markets they have a comparative advantage borrowing in, and do an interest rate swap.

What is the annual interest (in $) paid on the loans of both banks combined if they agree to a swap?

What is the net economic benefit (in $) of this swap?

Suppose the economic benefit of this swap is split between both banks evenly, and the fed funds rate remains at 4%. After the swap agreement, how much annual interest is the stronger credit bank paying?

Note that the primary lending market is not aware of this swap, as it is a private contract between the two banks. For example, if the stronger credit bank borrows $10,000,000 at 8% from the primary lending market, then they are obligated to pay the lender $800,000 of interest, which will likely be different than the net amount that they are supposed to pay out according to the swap contract.

How much money (in $) must the weak bank transfer to the large bank annually in order to honor the swap contract?