The setting: The local school district was planning to build a new high school. The estimated cost of the building was around $100M. To finance the building the school district needed to issue a bond for about $58M. It had two choices:

[1] Issue a fixed rate bond or

[2] issue a floating-rate bond and enter into a swap to receive floating and make fixed payments.

Question 1: Calculate the payments (cashflows) of a fixed-rate 10-year bond with face value $58M, coupon rate 4% that will be sold at face value.

Question 2: Calculate the payments (cashflows) of a floating-rate 10-year bond with face value $58M that will be sold at face value.

[a] after the bond is sold the short-term interest rate increases to 5.5% per year and is expected to stay at that level.

[b] after the bond is sold the short-term interest rate decreases to 2% and is expected to remain at 2% for the next 5 years. After 5 years the interest rate is expected to increase to 4% and remain stable.