Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one year; the second in two years. You have the following information on LIBOR rates:One-year spot rateis 3% per year.Forward ratein the second year is 5% per year.(Show all work)

a)What must be the annualized two-year spot LIBOR rate?

b)Find the floating-rate payments to be made.

c)Find the present value of the floating-rate payments.

d)Find the fixed rate that would price the swap correctly.

e)Now suppose that at T=1, just after the first payments were made, interest rate over year two turns out to be 6% per year (instead of 5% originally estimated). Which party is at a loss now: the one making the fixed payments, or the one making the floating payments? Which party faces credit risk?