Consider the following interest-rate swap:

• The swap starts today, January 1 of year 1.

• The floating-rate payments are made quarterly based on actual/360.

• The reference rate is three-month LIBOR.

• The notional amount of the swap is $40 million.

• The term of the swap is three years.

a. Suppose that today three-month LIBOR is 5.7%. What will the fixed-rate payer for this interest rate swap receive on March 31 of year 1 (assuming that year 1 is not a leap year)?

b. Assume the Eurodollar futures price for the next seven quarters is as follows:

Compute the forward rate for each quarter and the floating-rate payment at the end of each quarter.

c. What is the floating-rate payment at the end of each quarter for this interest-rate swap?

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No. of Euro- Days dollar Quarter Starts Quarter Ends in Futures Quarter Price April 1 year 1 June 30 year 1 91 94.10 July 1 year 1 Sept 30 year 1 Oct 1 year 1 Dec 31 year 1 Jan 1 year 2 Mar 31 year 1 April 1 year 2 June 30 year 2 July 1 year 2 Sept 30 year 2 Oct 1 year 2 Dec 31 year 2 2222 92 94.00 92 93.70 90 93.60 91 93.50 92 93.20 92 93.00