1. Consider a T-year floater with a par value of $100 paying a coupon of (Libor + c%).

a. Show that the price of this floater is equal to that of a T-year floater paying Libor + the value of a fixed annuity of $c for T years.

b. (*) Assume the appropriate discount rate for this floater is (Libor + s%). When will this floater be trading at a premium? When will it be trading at a discount?

2. Consider a 2-year swap with a notional of $100 (paying annually). The effective 1-year spot rate is 5% and the 2-year spot rate is 6%.

a. What is the fixed swap rate?

b. Three months after swap initiation, interest rates flatten at 6%. What is the value of the swap?