An investor took out a loan of $15,000 for three years at a variable interest rate where the interest rate resets at the beginning of each year to the 1-year spot rate. The investor will make an interest payment to the lender at the end of each year and repays the loan amount at the end of 3 years. The 1-year spot rate is 3%, the 2-year spot rate is 4%, and the 3-year spot rate is 6%. The investor decided to enter into an interest rate swap to fix the interest rate for 3 years where the terms of the swap match the terms of the loan. Determine the level swap rate R.

An investor took out a loan of $15,000 for three years at a variable interest rate where the interest rate resets at the beginning of each year to the 1-year spot rate. The investor will make an interest payment to the lender at the end of each year and repays the loan amount at the end of 3 years. The 1-year spot rate is 3%, the 2-year spot rate is 4%, and the 3-year spot rate is 6%. The investor decided to enter into an interest rate swap to fix the interest rate for 3 years where the terms of the swap match the terms of the loan. Determine the level swap rate R.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 20P

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