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 7% and the fixed rate on 10-year par value swaps that Star Bank would offer MEJ is 150 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. 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. Given that MEJ’s fixed-rate bonds trade at 200 basis points above T-bond rates, what would be MEJ’s semiannual interest payments on the funds that it borrows?

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