A Bank Makes Long-Term Fixed-Rate Loans,and Funds Itself with Short-Term

question 6

Multiple Choice

A bank makes long-term fixed-rate loans,and funds itself with short-term deposits.It can best manage its vulnerability to interest rate changes by

• A)Entering into a basis (floating-floating)swap.
• B)Entering into a pay-floating/receive-fixed interest rate swap.
• C)Entering into a pay-fixed/receive-floating interest rate swap.
• D)Entering into a fixed-fixed swap where the two legs have different payment frequencies.

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Definitions:

Tax Revenue

The earnings achieved by governments by levying taxes.

Excess Burden

The cost to society created by market inefficiency, mainly used in the context of taxes that cause consumers and producers to alter their behavior in ways that reduce economic well-being.

Excess Burden

The cost to society created by market inefficiency, which occurs when goods or services are not produced or allocated efficiently.

Economic Decisions

Choices made by individuals, households, firms, or governments regarding allocation of scarce resources to satisfy various needs and desires.