XYZ Bank has $100 million of floating rate loans yielding the T-bills rate plus

Question

XYZ Bank has $100 million of floating rate loans yielding the T-bills rate plus 4 percent. These loans are financed by $100 million of fixed-rate deposits costing 5 percent. ABC Bank has $100 million of mortgages with a fixed rate of 13 percent. They are financed by $100 million of CDs with a variable rate of T-bills plus 5 percent.

If the SWAP is feasible then what would be the combined (total) spread this SWAP will generate?

If the SWAP is feasible then what would be the SWAP benefits XYZ Bank will get from ABC Bank if XYZ gives all its ROA to ABC Bank and both banks split the combined spread evenly?

10.5%

9.5%

8.5%

7%

10.5%

9.5%

8.5%

7%

Explanation / Answer

8.5%

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