Problem 2 [5] The following spot rates are observed in the market t (years) is (%) 1 6.50 2 6.68 6.84 4 6.95 7.12 > 6 7.50 ABC Ltd. borrows $100 millions at floating interest rates for 10 years. Level...

Extracted text: Problem 2 [5] The following spot rates are observed in the market t (years) is (%) 1 6.50 2 6.68 6.84 4 6.95 7.12 > 6 7.50 ABC Ltd. borrows $100 millions at floating interest rates for 10 years. Level interest- only repayments are made annually at the end of the year. To reduce their interest rate risk ABC Ltd. wants to enters a interest rate swap as a fixed-rate payer. a) Calculate the swap rate based on the current information.


Extracted text: b) The actual interest rates of the first 5 years are given by 6.50%, 6.65%, 6.85%, 6.98%, &7.05%. Determine the cashflows for ABC Ltd. regarding to the interest rate swap for the first 5 years. Calculate the present value of the profit/loss for ABC Ltd. using the actual interest rates. c) At the beginning of year 5, the following spot rates are observed t (years) | is (%) 1 7.25 2 7.45 7.58 4 7.65 7.70 Determine the market value of ABC Ltd.'s position regarding the interest rate swap.