Suppose that Yankee Savings Bank pays its depositors an interest rate on six-month CDs that is 25 basis points (0.25%) h

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Suppose that Yankee Savings Bank pays its depositors an interest
rate on six-month CDs that is 25 basis points (0.25%) higher than
the six-month Treasury bill rate. Because its assets are long-term
fixed-rate mortgages, Yankee would prefer to be borrowing at a
ten-year, fixed interest rate. If it borrowed on its own, Yankee
would have to pay 12% per year. On the other hand, suppose Global
Products, Inc. has good access to fixed-rate borrowing overseas. It
can borrow for 10 years at a fixed rate of 11 %. However, it would
prefer to borrow on floating-rate terms. If it did so, it would
have to pay 50 basis points over the six-month Treasury bill. Show
how both companies could improve their situations through an
interest-rate swap.

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