Suppose that Microsoft has arranged to borrow $100 million at LIBOR plus 10 basis points (so the rate is LIBOR plus 0.1%). Microsoft is worried that rates are about to rise, and it would like to lock in a fixed interest rate on its borrowings.

Microsoft has entered into the swap where Citigroup agrees to pay Microsoft LIBOR rate on a notional principal of $100 million and in return Microsoft agrees to pay to Citigroup a fixed interest rate of 3% on the same notional principal.

a. Show the interest payments on Microsoft borrowings, net cash flow from swap, and total payments.

b. What interest rate will Microsoft pay on that fixed-rate loan?