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A corporation enters into a $35 million notional principal plain vanilla interest rate swap. The swap calls for the corporation to pay a fixed rate and receive a floating rate of LIBOR. The payments will be made every three months for one year. The term structure of LIBOR when the swap is initiated is as follows:

Months Rate (%)

3 7.00

6 7.25

9 7.45

4 7.55

Assume all of rates are continuously compounded.

a. Determine the fixed rate on the swap.

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