Consider the following interest-rate swap:
• The swap starts today, January 1 of year 1.
• The floating-rate payments are made quarterly based on actual/360.
• The reference rate is three-month LIBOR.
• The notional amount of the swap is $40 million.
• The term of the swap is three years.
a. Suppose that today three-month LIBOR is 5.7%. What will the fixed-rate payer for this interest rate swap receive on March 31 of year 1 (assuming that year 1 is not a leap year)?
b. Assume the Eurodollar futures price for the next seven quarters is as follows
Compute the forward rate for each quarter and the floating-rate payment at the end of each quarter.
c. What is the floating-rate payment at the end of each quarter for this interest-rate swap?