Suppose the MEJ Development Company in Question 2 hedges its planned

$300 million bond sale in two years by taking a position in the forward swap contract offered by Star Bank. Also suppose that at the forward swap’s expiration date, 10-year T-bonds are trading at 5% and the fixed rate on 10-year par value swaps that Star Bank would offer MEJ is 50 bp above the T-bond yield.

a. What would be the value of the swap underlying MEJ’s forward swap at the expiration date?

b. Given that MEJ’s fixed-rate bonds trade at 200 basis points above T-bond rates, what would be the amount of funds MEJ would need in order to refinance its $300 million short-term loan obligation and close its swap position?

c. What would be MEJ’s annualized rate based on the $300 million funds it needs for refinancing?