Question
Kate borrowed 300,000 from her bank. She will repay 100,000 of principal at the end of each of the next three years. She will pay
Kate borrowed 300,000 from her bank. She will repay 100,000 of principal at the end of each of the next three years. She will pay the bank a variable interest rate equal to the one-year spot interest rate at the beginning of each year. Kate would prefer a level interest rate so she enters into a swap with Lauren. Kate will pay a fixed swap rate to Lauren and Lauren will pay a variable rate to Kate. The variable rate will be the same rate that Kate pays her bank. You are given the following spot rates. Calculate the swap interest rate.
Time (t) Spot Rate (r)
1 4.3%
2 4.6%
3 5.1%
4 5.4%
5 5.6%
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