2. Suppose the current prices for $1 zero coupon bonds are: 9969 for 1-year, 9881 for 2-year and .9766 for 3-year.

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) Suppose Company A borrows $40,000 for 3 years. Assume the loan is interest only and variable rate. Company A wants a fixed rate for the final two years of the loan. (They will pay the floating rate for the first year.) What is the swap rate?

d) If Company B enters into the interest rate swap from part c), what is the net amount that Company B will pay in year 3 assuming interest rates do not change?