Final answer:
To calculate the breakeven five year fixed rate, you must consider the yield to maturity rates for each of the five years and the 2.5% spread of the floating rate loan. The breakeven rate would usually be the average of the expected future spot rates over the five years plus the 2.5% spread.
Step-by-step explanation:
The question involves calculating the breakeven five year fixed rate for a floating rate loan that is converted to a fixed rate loan using a swap contract. To find the breakeven rate, you must consider the yield to maturity (YTM) rates given for the five-year period, which are 4.5%, 4.0%, 3.75%, 3.5%, and 3.375%. As the floating rate loan has a spread of 2.5% above the one-year spot rate, you would want a fixed rate that is equivalent to the expected cost of the floating rate over the next five years.
While an exact calculation would require additional information on the one-year spot rates over the next five years, generally, the swap contract would aim to fix the rate at a level that reflects the expected future short-term rates plus the 2.5% spread. If, hypothetically, future spot rates are expected to average at the given YTM rates, the breakeven fixed rate would be calculated as an average of these rates plus the 2.5% spread.