Question: A borrower has a three-year, interest-only floating rate loan with a notional principal amount of $100,000 from a lender. The current term structure has 1=0.08,

A borrower has a three-year, interest-only floating rate loan with a notional principal amount of $100,000 from a lender. The current term structure has 1=0.08, 2=0.09and 3=0.095. It was established that the swap rate = 0.0942. Suppose that one year after the swap is arranged, the term structure of interest rates is as follows:

A borrower has a three-year, interest-only floating rate loan with a notional

(a) Determine the market value of the swap to the payer (b) Suppose that a new two-year swap is arranged at time 1. Determine the swap rate for this new swap

Maturity Annual Effective Spot Rate 1 year 7% 2 year 7.5% Maturity Annual Effective Spot Rate 1 year 7% 2 year 7.5%

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