In this workout, a company has arranged a five year bank loan on which they will pay SOFR plus 225 bps. They wish to lock in a fixed rate and see the following swap quote from a market maker. We have a five year maturity with a bid price and an offer price. The first question says, will they pay or receive the fixed rate on the swap? Well, if we look back to the question, they've arranged a five year bank loan, they are going to be receiving the loan on which they will have to pay. They're going to pay interest of SOFR plus 225% bps. So this is going to be a pay fixed rate on the swap. The second question says, which of the two rates will they trade at? Well, because we're paying interest, we'd definitely prefer the lower of the two rates. We'd prefer to pay 4.05% rather than 4.07%, but that's not how bid offer prices work. The market maker that has provided these prices, they're always going to charge us the worst of the two for us. They make money on the difference between the two. So we're going to be paying the offer price, and that offer price is the 4.07%.

Thirdly, what all in rate will they have locked in by using the swap? Well, we have to pay the swap rate, but the second thing it said in the question, it said that we'll pay over plus 225 bps. So that's 2.25% loan margin. And if we sum that up, it gets us to an all-in rate of 6.32%.