la) Under the terms of a currency swap, a company has agreed to receive a fixed interest rate of 10% per annum on an American dollar loan with a notional principal of $5 million. In exchange, the company will pay a fixed interest rate of 8% per annum on a Dutch Euro Loan with a notional principal of 2.5 million. Net interest payments are exchanged every six months. The swap has a remaining life of thirteen months. The current interest rates are 7% per annum in America and 6% per annum in Holland. Assume both rates are with continuous compounding for all maturities (Assuming a flat terms structure). The current exchange rate is 1 = $2. Calculate the current value of the currency swap for the company in American dollars. 10 Marks b) If investors perceive greater interest rate risk, what will happen to equilibrium interest rate in the bond market? Explain using the bond demand and supply framework. 2 Marks c) How will a decrease in the federal government's budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework. 2 Marks d) What is the expected return on a bond if the return is 9% two-thirds of the time and 3% one- third of the time? What is the standard deviation of the returns on this bond? Would you prefer this bond or one with an identical expected return and a standard deviation of 4.5? Why? 4 Marks