Permian Commercial Bank wants to borrow $50 million for a period of three years, starting one year from today, because it anticipates lending to a company that will begin constructing a gas processing plant one year from today. The bank’s CFO proposes that the bank borrow by means of buying and selling zeros, in effect, creating a synthetic loan by which it can borrow. Assume that the one-year zero rate is 3.3%, the two-year zero rate is 3.86%, the three-year zero rate is 4.44%, and the four-year zero rate is 5.1%. All rates are annualized and continuously compounded. At what rate will the bank be able to borrow if it follows the proposal of its CFO?
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