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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 finterest 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.
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