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A company enters into a four-year loan agreement under which it will receive 50 million at the eginning of each year for four years. The
A company enters into a four-year loan agreement under which it will receive 50 million at the eginning of each year for four years. The company will pay interest at the end of each year base ACTS 4308. AU 2018. HOMEWORK 11 on the 1-year spot rate as of the beginning of that year. At the end of four years, the company will pay the 4th year's interest and repay the principal of 200 million Suppose on the date of the loan the yield curve is as follows: Years to maturity tk (annual effective) Spot Rate rtz 6.25% 6.50% 6.75% 7.00% 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, and 4. Problem 7 Calculate the annual effective one-year deferred fixed swap rate
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