Problem 3 Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one year; the second in two years. You have the following information on LIBOR rates: One-year spot rate is 3% per year. Forward rate in the second year is 5% per year. a) b) c) d) e) What must be the annualized two-year spot LIBOR rate? Find the floating-rate payments to be made. Find the present value of the floating-rate payments. Find the fixed rate that would price the swap correctly. Now suppose that at T-1, just after the first payments were made, interest rate over year two turns out to be 6% per year (instead of 5% originally estimated). Which party is at a loss now: the one making the fixed payments, or the one making the floating payments? Which party faces credit risk