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A company borrows 20 million dollars under a 5-year interest-only loan, agreeing to pay interest at the end of each year based on the 1-year

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A company borrows 20 million dollars under a 5-year interest-only loan, agreeing to pay interest at the end of each year based on the 1-year spot rate as of the beginning of that year. At the end of 5 years, the company will pay the 5th year's interest and repay the principal of 20 million. Suppose on the date of the loan the yield curve is as follows Spot Rate Ttk Years to maturity tk (annual effective) 6.25% 6.50% 6.75% 7.00% 2 The company arranges an interest rate swap in order to eliminate the uncertainty about the amounts of future interest payments. Since the loan interest rate for the first year is known to be 6.25%. the company decides there is no risk that needs to be hedged during the first year. Therefore, the company enters into a one-year deferred interest rate swap covering the interest payments at the end of years 2, 3, 4 and 5 Problem 9 Calculate the annual effective one-year deferred fixed swap rate

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