Companies A and B have been offered the following rates per annum on a 10 million 4-year investment:

Company Fixed Rate Floating Rate Company A 6:0% LIBOR Company B 6:6% LIBOR + 0:2%

(a) Design a swap between company A and company B that is equally attractive to both companies, if company A requires a fixed-rate in- vestment and company B requires a oating-rate investment?

(b) A swap can be viewed as a package of zero coupon bonds and oating rate bonds. Carefully explain this statement. If you need to introduce any notation, you should dene it clearly. No calculations are needed.

(c) A swap can be viewed as a package of forward rate agreements. Care- fully explain this statement. If you need to introduce any notation, you should dene it clearly. No calculations are needed.

(b) How many steps should we use in practice? What do you think?