John is the CFO of company A and one of his recent tasks is to borrow $10 million for 3 years to fund the company's newly initiated project. Due to the pattern of expected cash flows generated from the to-be-funded project, John wants to have a loan with a fixed rate. He called his banks and received quotes on fixed rate 8.0% and floating rate 0.5% above the LIBOR.All rates are annualised rate in quarterly compounding.

John passes this information to his regular financial consultant Tom to seek advice. After receiving this information, Tom quickly links this case with his another customer Bob, who is the CFO of company B. Bob is looking for a $10 million 3-years floating rate loan and has received a floating rate quote 1.5% above the LIBOR and a fixed rate quote 8.5%. All rates are annualised rates in quarterly compounding.

Tom immediately realises that he can make a decent revenue by organising separate swap contracts with John and Bob simultaneously.

Tom decides to charge 14bps (i.e., 14 basis point, 1% = 100bps), and let John and Tom equally share the rest of benefit if there is any left.

Part I.

Design a swap contract between company A and FI which Tom works for, show your working/analysis process explicitly. Use the following table to organise key information in swap contract arrangement. With the swap contract with FI, what is the net interest rate that company A has to pay for the loan?