Question
JP Morgan Chase and Facebook would like to enter an interest rate swap on September 25 th , 2021 on a principal notional of $150
JP Morgan Chase and Facebook would like to enter an interest rate swap on September 25th, 2021 on a principal notional of $150 million dollars. JP Morgan Chase will make annual floating payments according to 1-year T-Bill rates plus 30 basis points. Facebook in return will make fixed payments on annual basis. The first cash flow exchange will occur on September 25th, 2022. The contract will last for a period of 10 years, e.g., there will be a total of 10 payments for each company. On September 25th, 2021, the following T-Bill rates are observed
MaturityT-Bill Rate (%)1 year1.072 years1.223 years1.364 years1.485 years1.696 years1.827 years1.948 years1.179 years1.3310 years1.81If there is no cash settlement at the initiation of the contract, what should be the fair fixed rate that Facebook must pay annually?
0.67%
10.54%
2.06%
5.09%
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