Question
1. Suppose that currently the annual effective rates are: 3% for one year, 3.5% for two years and 4.25% for 3 years. a) For a
1. Suppose that currently the annual effective rates are: 3% for one year, 3.5% for two years and 4.25% for 3 years.
a) For a 3-year interest-only, floating-rate loan, find the swap rate for a fixed interest rate loan that would be equivalent to the interest rates given above.
b) Suppose Company A borrows $40,000 for 3 years. Assume the loan is interest only and variable rate. Company A wants a fixed rate and enters into an interest rate swap with Company B. What is the net amount that Company B will pay at the end of the second year assuming interest rates do not change?
C) For the swap in part b), what is the value of the swap to Company B at the end of year 2 (after all interest payments), if at year 2 the spot rate for 1 year is 4%.
d) Now suppose Company A borrows $40,000 now and another $30,000 a year from now. Again, the loans are interest only and variable rate and all the principal is due in 3 years. Company A wants a fixed rate and enters into an interest rate swap with Company B. What is the swap rate?
e) For the swap in part d), what is the net amount that Company B will pay at the end of the second year assuming interest rates do not change.
f) For the swap in part d), what is the value of the swap to Company B at the end of year 2 (after all interest payments), if at year 2 the spot rate for 1 year is 4%.
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