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Suppose that you have $20,000 in savings that you repeatedly invest in 6-month bank certificate of deposits (CDs). After each 6-month period you spend the
- Suppose that you have $20,000 in savings that you repeatedly invest in 6-month bank certificate of deposits (CDs). After each 6-month period you spend the earned interest. Youve noticed that the quoted rate on these CDs is always 1% less than the 6-month LIBOR rate. You dont like the uncertainty of the changing rate so you decide to enter a 3-year interest rate swap contract to keep your interest payments steady.
- What side of the swap contract should you take? Explain your reasoning.
- If the swap rate is 3.8%, what is the effective interest rate of your modified investment?
- Your final swap payment will occur 3 years from today, 3/24/2023. Describe the relevant LIBOR rate for this payment (i.e. the x-month LIBOR rate from date y).
- Suppose this LIBOR rate ends up being 3.5%. Calculate:
- Your net swap payment
- Your net interest after combining this with the interest from your CD.
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