Bank Five has fixed-rate bond costs of 8.25% and variable-rate bond costs of 6.5%. Bank Cinco has fixed-rate bond costs of 8.75% and variable-rate bond costs of 5.5%. The two parties would like to have the opposite types of cheaper financing. To lower the cost of funds, what should their liability swap be:

Question

Quizplus · Accepted Answer

The bank with the cheaper fixed-rate cost would issue fixed-rate bonds, and the bank with the cheaper variable rate cost would issue variable-rate bonds, and the two banks would swap payments.

Bank Five Has Fixed-Rate Bond Costs of 8