Swap Rates

Maturity (years) Bid Ask Swap Rate

2 2.55 2.58 2.565

3 2.97 3.00 2.985

4 3.15 3.19 3.170

5 3.26 3.30 3.280

7 3.40 3.44 3.420

10 3.48 3.52 3.500

(a) Company A has been offered the rates shown in the Table. It can borrow for three years at 3.45%. What floating rate can it swap this fixed rate into?

(b) Company B has been offered the rates shown in the Table. It can borrow for 5 years at LIBOR plus 75 basis points. What fixed rate can it swap this floating rate into? Explain the rollover risks that Company B is taking

2. (a) Company X has been offered the rates shown in the Table in Question 1. It can invest for four years at 2.8%. What floating rate can it swap this fixed rate into?

(b) Company Y has been offered the rates shown in the Table in Question 1. It is confident that it will be able to invest at LIBOR minus 50 basis points for the next ten years. What fixed rate can it swap this floating rate into?