Rick Melnick is responsible for the supervision of the Student Educational Loan Fund (SELF) – a funding pool for Harvard Business Students. SELF is altering the policy of students loans of differing rates from semiannual terms to loans that have fixed-rate and require equal payments every month. Melnick needs to determine how to fund SELF under the new loan policy. SELF can make use of products that have a broad interest-rate derivative range in order to alter the present means of funding.
How can SELF turn its floating-rate financing into fixed-rate financing? At what rate students should be charged for the new loan?
How should SELF deal with the prepayment problem? What is the impact of prepayment problem on the rate charged to students?