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