First Bank can issue one-year floating-rate CDs at prime plus 1 percent or fixed-rate CDs at 12.5 percent. Second Bank can issue one-year floating-rate CDs at prime plus 0.5 percent or fixed-rate CDs at 11.0 percent.
a. What is a feasible swap with all the benefits going to First Bank?
b. What is a feasible swap with all the benefits going to Second Bank?
c. Diagram each situation.
d. What factors will determine the final swap arrangement?
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