For bonds, assume coupons paid semi-annually, coupon rates and yields quoted with semi-annual compounding, and redeemable at par unless otherwise noted.

Calculate the fixed interest rate of an interest rate swap with a two-year term if the 1yr spot rate is 3% and the 2yr spot rate is 4%. The variable rate of the swap is reset annually to the beginning of year one-year spot rate and payments settle annually at the end of the year.