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Three years ago, ABC AG arranged five-year fixed borrowing facility at 5%. At that time the company correctly predicted that interest rates were about to fall, and decided to receive fixed on a five year-year swap at 4%.Today, interest rates are lower and ABC AG will enter into a 2 year swap to lock in these lower rates. Current swap rates are:
Maturity Bid (%) Offer (%)
2 year 1.30 1.40
3 year 1.50 1.60
4 year 1.90 2.00
5 year 2.10 2.20
a) Draw a diagram showing the companyâs existing borrowing situation and how using the 2-year swap can change their borrowing profile. (5 marks)
b) Calculate a forward starting one year swap rate starting in two yearsâ time. You may assume the following (10 marks): The discount factor for year one is 0.98 Annual fixed payments, Accrual factor of 1
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