Acme Manufacturing wants to raise $$100$ million of $3-$year debt in the Euromarket $($where interest is

quoted and paid on an annual basis$).$ Its alternatives are either a $3-$year fixed$-$rate note at a spread of

$250$ basis points over the $3-$year U$.$S$.$ Treasury $($currently yielding $4\mathrm{.}50\%)$ or a $3-$year floating$-$rate note

on which it must pay yearly interest of $1-$year LIBOR $+2\%(1-$year LIBOR currently yields $3\mathrm{.}70\%$;

therefore, the floating$-$rate note's first interest payment of $$5\mathrm{.}7$ million would be paid at the end of

year $1).$ However, Acme wants to have a fixed$-$rate liability for the entire $3$ years. Assuming the

following instruments also are available to Acme $($with National Trust, an AAA$-$rated bank, as the

counterparty$),$ which strategy will enable Acme to pay the lowest all$-$in fixed rate of interest $($assume

all rates are quoted on an annual basis$)?$

Swap: $3-$year swap has all$-$in pay$-$fixed rate of $3-$year Treasury $+30$ basis points

$(=4\mathrm{.}50\%+0\mathrm{.}30\%)$ versus receiving $1-$year LIBOR.

FRAs: ${?}^{14},12/24$ FRA has all$-$in pay$-$fixed rate of $2-$year Treasury $+90$ basis points

$(=4\mathrm{.}10\%+0\mathrm{.}90\%)$ versus receiving $1-$year LIBOR.

$24/36$ FRA has all$-$in pay$-$fixed rate of $3-$year Treasury $+150$ basis points

$(=4\mathrm{.}50\%+1\mathrm{.}50\%)$ versus receiving $1-$year LIBOR.

Caps: Premiums for $3-$year caps $($with annual pay$)$ on $1-$year LIBOR:

Floors: Premiums for $3-$year floors $($with annual pay$)$ on $1-$year LIBOR: