Morgan Stanley and Apple agree on an interest rate swap on September 29, 2020 on a notional principal of $200 million. Morgan will make annual floating-rate payments according to the 1-year LIBOR plus 0.25%. Apple in return will make annual fixed-rate payments. The first cash flow exchange will occur on September 29, 2021. The contract will last for a period of 3 years. On September 29, 2020, the following LIBOR zero rates and the continuously compounded interest rates are as follows:

Maturity	LIBOR Zero Rate (%)	Risk-free Rate (%)
1 year	1.75	1.00
2 years	2.00	1.00
3 years	2.25	1.00

a) If there is no cash settlement at the initiation of the contract, what should be the fair fixed rate that Apple pays?

b) If Apple prefers a fixed rate of 3% annually, what cash settlement is needed between the parties on September 29, 2020 in order to have a fair contract?

c) On September 29, 2022, the LIBOR zero rate and risk-free interest rate for the remaining one year are:

Maturity	LIBOR Zero Rate (%)	Risk-free Rate (%)
1 year	2.75	1.00

Compute the value of the swap to Morgan (assuming a 3% fixed rate).

d) Apple can borrow at 3.1% in the fixed-rate loan market and at LIBOR plus 0.25% in the floating-rate loan market. Microsoft can borrow at 2.6% in the fixed-rate market and at LIBOR plus 0.05% in the floating-rate market. Which company has a comparative advantage in the fixed-rate market? Explain your answer.