Rimsa Savings is a savings institution that provided Carson Company with a mortgage for its office building. Rimsa 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 Rimsa Savings?
B. Why is Rimsa willing to allow Carson Company to transfer its interest rate risk to Rimsa? (Assume that there is an upward-sloping yield curve.)
C. If Rimsa 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 Rimsa 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?