A finance company raised $50 million by issuing a 6-year bond, paying 10% interest per annum. The company gives 1-year loans, totaling $50 million at prime rate + 8% per annum, where the prime rate will be at the-end-of-year prime rate.

Now consider the following interest rate swap:

National principal: 50 million

Term: 6 years

Fixed rate payment, or receipt, at: 12% per annum

Floating rate payment, or receipt, at: the prime rate plus 7%

Show how the finance company can use the interest rate swap to eliminate its reinvestment rate risk. (6 marks)

(i) Suppose that an investor can buy units of a mutual fund at the prevailing net asset value of $30 per unit. Assume that the mutual fund charges 3% front-end fee for the purchase of its units. What is the total amount the investor will pay for buying 1,000 units of the mutual fund?