(3) Suppose the Star and Moon companies both have the same quality ratings with the following fixed and floating rate loan alternatives. What is the total possible interest rate reduction gain for both parties if both parties were to create synthetic positions with a swap? Where business is tanght with hamanity in mind. Fixed-Income 1 3. Given the following: a. The yield on a five-year, risk-free Treasury-note =5% b. The yield on a five-year, BB-quality bond =8%, with the 3% spread reflecting only credit risk c. The credit spread on a five-year CDS on the 5-year, BB-quality bond of 2% (1) Explain how a bond investor looking for a five-year, risk-free investment could gain a 1% yield over the risk-free investment by using a CDS. (2) Explain what an arbitrageur would do. (3) Comment on the impact the actions by investors and arbitrageurs would have on determining the equilibrium spread on a CDS