You are a pension fund manager who anticipates having to pay out 8 percent (paid semi-annually) on $100 million for the next seven years.You currently hold $100 million of a floating-rate note that pays LIBOR+0.025. You view this as an attractive investment.

a. You realize that you are facing a risk of not having enough cash to make your fixed payments. On what level of LIBOR, you will not have enough cash to make that fixed payment.

b. You arrange a swap with a dealer who agrees to pay you 6 percent fixed, while you pay it LIBOR. Assume each period is 180 days and there are 360 days in the year. Determine your final cash flow as a percent of the notional amount at each payment date after entering such arrangement.