Suppose GHI Bank has a portfolio of 8-year fixed rate mortgages with total principal amount of $50 million and interest rate is 9%. Interest is paid semi-annually and principal is scheduled to be repaid at maturity. GHI Bank finances its loan portfolio with six-month certificate of deposits (CDs) at an interest rate equal to six-month LIBOR plus 50 basis points.   Question: Suppose GHI Bank enter into a 8-year fixed-floating interest rate swap is available with a notional amount of $50 million in which GHI Bank pays a fixed 8% every six months and received 6-month LIBOR. Explain how can the bank use this swap to hedge its interest rate exposure.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.