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Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one
Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one year; the second in two years. You have the following information on LIBOR rates: One-year spot rate s1=3% per year. Two-year spot rate s2=4%. Annual compounding applies.
a) Find the forward rate f for the second year
b) Find the floating-rate payments to be made.
c) Find the present value of the floating-rate payments.
d) Find the fixed rate that would price the swap correctly.
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