A trust company sells a certificate of deposit for $10 million, obligating the trust company to pay a floating rate of interest equal to the bank's prime rate for the next five years. At the same time, the trust company makes a $10 million mortgage loan that requires the borrower to pay a fixed 9% rate of interest for the same five year period. Suppose the trust company prefers to receive floating rate income and pay fixed rate costs. Also assume the trust company wishes to earn the prime rate plus 3% even if interest rates fluctuate over the next five years. Construct a swap with a single counterparty to satisfy the trust company. Be sure to make the directions of the cash flows clear, and ignore transaction costs.

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The Answer of A trust company sells a certificate of deposit for $10 million, obligating the trust company to pay a floating rate of interest equal to the bank's prime rate for the next five years. At the same time, the trust company makes a $10 million mortgage loan that requires the borrower to pay a fixed 9% rate of interest for the same five year period. Suppose the trust company prefers to receive floating rate income and pay fixed rate costs. Also assume the trust company wishes to earn the prime rate plus 3% even if interest rates fluctuate over the next five years. Construct a swap with a single counterparty to satisfy the trust company. Be sure to make the directions of the cash flows clear, and ignore transaction costs.

A Trust Company Sells a Certificate of Deposit for $10