PLEASE SHOW ALL STEPS WITHOUT USING EXCEL OR SPREADSHEETS

Shyu & Salisbury Actuarial Consultants purchased a deferred interest rate swap with a level notional amount of 125,000. Under the swap, Shyu & Salisbury will swap a variable interest rate for a fixed interest rate during the last three years of a five-year swap. No swapping of interest rates will occur during the first two years. The variable interest rate during each one-year settlement period will be the one-year spot interest rate at the start of the year.

Determine the swap rate.

Time Spot Rate 4.00% 1 2 3 5.00% 5.75% 6.25% 6.50% 4 5