Isabella took a loan of $4,000 today and an additional $4,500 a year later. The 1-year spot rate is 3% and the 2-year spot rate is 4%. Under the loan, the interest rate resets at the beginning of each year and is equal to the one-year spot interest rate at the time of the reset.
Isabella enters into an interest rate swap with a two year term and annual settlement periods under which she will swap the variable interest rate for a fixed interest rate. Determine the level swap interest rate R

A. 3.5%
B. 3.62%
C. 3.98%
D. 4.04%
E. 4.35%