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.