Suppose the current prices for 1 zero coupon bonds are 98, Ask an Expert

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Suppose the current prices for $1 zero coupon bonds are: .98 for 1-year, .97 for 2-year and .95 for 3-year.

a) For a 3-year interest-only, floating-rate loan, find the swap rate for a fixed interest rate loan that would be equivalent to the interest rates given above.

b) Suppose Company A borrows $40,000 for 3 years. Assume the loan is interest only and variable rate. Company A wants a fixed rate and enters into an interest rate swap with Company B. What is the net amount that Company B will pay in the second year assuming interest rates do not change?

c) Suppose Company A borrows $40,000 for 3 years. Assume the loan is interest only and variable rate. Company A wants a fixed rate for the final two years of the loan. (They will pay the floating rate for the first year.) What is the swap rate?

d) If Company B enters into the interest rate swap from part c), what is the net amount that Company B will pay in year 3?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92855187

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