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ABC Life Insurance Company enters into a one-year interest rate swap with a notional value of 10 million. Under this swap, ABC will pay a variable interest rate each quarter and in return will receive a fixed interest rate each quarter. The variable interest rate will adjust each quarter to be the three-month spot interest rate at the start of each quarter.

The spot interest rates at the time of the purchase of the swap are those in Table 1 but are repeated here for your convenience:

a. Determine the swap interest rate per quarter.

b. Determine the net swap payment that will be made at the end of the first quarter.

c. State whether ABC will receive the payment in b. or be required to make the payment in b.

t t 0.25 0.50 0.75 1.00 1.25 1.50 r 1.00% 1.10% 1.22% 1.35% 1.50% 1.75% 1.75 2.00 2.25 2.50 2.75 3.00 2.05% 2.40% 2.75% 3.05% 3.30% 3.50% t t 0.25 0.50 0.75 1.00 1.25 1.50 r 1.00% 1.10% 1.22% 1.35% 1.50% 1.75% 1.75 2.00 2.25 2.50 2.75 3.00 2.05% 2.40% 2.75% 3.05% 3.30% 3.50%