derivatives and risk management quesitons

1)Suppose that you have $20,000 in savings that you repeatedly invest in 6-month bank certificate of deposits (CDs). After each 6-month period you spend the earned interest. You’ve noticed that the quoted rate on these CDs is always 1% less than the 6-month LIBOR rate. You don’t like the uncertainty of the changing rate so you decide to enter a 3-year interest rate swap contract to keep your interest payments steady.

  1. [3] What side of the swap contract should you take? Explain your reasoning.
  2. [3] If the swap rate is 3.8%, what is the effective interest rate of your modified investment?
  3. [4] Your final swap payment will occur 3 years from today, 3/24/2023. Describe the relevant LIBOR rate for this payment (i.e. the x-month LIBOR rate from date y).
  4. Suppose this LIBOR rate ends up being 3.5%. Calculate:
    • i.[3] Your net swap payment
    • ii.[2] Your net interest after combining this with the interest from your CD.

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