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?