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

question 16

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.

---

Definitions:

Chief Justice

The presiding judge in the supreme court of many countries, or the principal judge of a particular court.

Conservative Economist

An economist whose work typically emphasizes free market policies, limited government intervention, and fiscal conservatism as means to achieve economic growth and stability.

Truman Doctrine

President Harry S. Truman’s program announced in 1947 of aid to European countries—particularly Greece and Turkey—threatened by communism.

Cold War

A period of geopolitical tension between the Soviet Union and the United States from the late 1940s to 1991, marked by espionage, political rivalry, and the threat of nuclear warfare.