Question 3. (This question has two parts: I and II)

In an interest rate swap, a financial institution pays 10% per annum and receives three-month LIBOR in return on a notional principal of $100 million with payments being exchanged every three months.

Part I.

The counterpart of the above financial institution is Company A. Company A can borrow from external party for 10.45% per annum. What floating rate can Company A swap this fixed rate into by entering above swap contract?

Part II.

Now the swap has a remaining life of 14 months. The average of the bid and offer fixed rates currently being swapped for three-month LIBOR is 12% per annum. The three-month LIBOR rate one month ago was 11.8% per annum. All LIBOR rates are simple interest rate, i.e., they are compounded quarterly. What is the current value of the swap contract to the financial institution if current market zero rates are 12% per annum quarterly compounding for all maturities?