Interest Rate Swaps Let us oonsider the following zero-yield curve: Maturity (years) Spot rate ( 1.00% 1.50% 2.00% 2.25% 0.5 2.0 (a) You would like to enter a fixed-for-floating interest rate swap with semi-annual payments for two years. The notional is $1,000,000. i. What is the fair swap rate o, and what is the corresponding fixed payment on the fixed arm of the swap? ii. What is the value of this swap at initiation? (b) After 1 year, the zero-yield curve becomes: Maturity (years) Spot rate( 1.50% 1 .90% 2.30% 2.50% 0.5 1.0 2.0 What is the current fair swap rate c for a fixed-for-floating interest rate swap with semi-annual payments for one year. How does it compare to the original swap rate on? (c) Determine the current value of your original swap (based on co) in light of the yield curve observed after 1 year. Interpret your resut Note. For simplicity, let us assume that the floating rate is the 6-mo Treasury zero-yield (not Libor) . Thus, there is no credit risk, and what we defined in class as the "Libor discount factors" exactly coincide with the standard discount factors extracted from the zero-yield curve. Eventually, we can use these discount factors (extracted from the above term structures)