Risma Savings is a savings institution that provided Carson Company with a mortgage for its office building. Risma recently offered to refinance the mortgage if Carson Company will change to a fixed rate loan from an adjustable rate loan.
A. Explain the interaction between Carson Company and Risma?
B. Why is Risma willing to allow Carson Company to transfer its interest rate risk to Risma? (Assume that there is an upward sloping yield curve)
C. If Risma maintains the mortgage on the office building purchased by Carson Company, who is the ultimate source of the money that was provided for the office building? If Risma sells the mortgage in the secondary market to a pension fund, who is the source that is essentially financing the office building? Why would a pension fund be willing to purchase this mortgage in the secondary market?