Suppose the XSIF Investment Trust in Question 5 hedges its planned $20 million bond investment in one year by taking a position in the one-year, 6.5%/LIBOR forward swap contract offered by Fort Washington Bank. Also suppose that at the forward swap’s expiration date, three-year T-notes are trading at par and the fixed rate on three-year par value swaps that Fort Washington would offer XSIF is 50 bp above the T-note yield.

a. What would be the values of the swap underlying XSIF’s forward swap at the expiration date if three-year T-notes are trading at 5% and 7%?

b. Determine XSIF’s investments after it closes its swap position and its annualized rate based on the $20 million investment in T-notes yielding 5% and 7%.