Use the spot rates below for questions 1 through 4. Assume for any swap that the variable rate of the swap is reset annually to the beginning of year one-year spot rate and payments settle annually at the end of the year.

Time	Spot Rate
1	2.00%
2	3.00%
3	3.50%
4	4.00%
5	4.50%

1. What is the value of f2, the one-year forward rate two years from now?

2. Calculate the fixed interest rate of an interest rate swap with a five-year term.

3. A company enters into a deferred interest rate swap, paying a fixed rate and receiving a variable rate for three years starting at the end of the third year . There are no payments at the end of the first or second years. What is the fixed interest rate of the swap?

4. A company wants to borrow $1000 for three years. It would make annual interest payments at the end of the year and return principal at the end of three years. The company can either borrow at a fixed rate of 3% or at a variable rate that is reset annually to the beginning of the year one-year spot rate. If the company borrows at a variable rate, it can enter into an interest rate swap to make fixed interest payments and receive variable interest. Would the company be better off borrowing at a fixed rate of 3% or at the variable rate and entering into an interest rate swap?