Part 2: Interest Rate Swaps Use the same term structure of zero-coupon yields as in Part 1. Maturity r 0.5 0.02 0.025 1.5 0.03 0.04 Semi-annually compounded interest rates 1. What is the fair fixed rate in a 2-year interest rate swap in which fixed and floating payments are exchanged every six months? Note that this is a little different from the lecture slides where payments were quarterly and the reference rate was the three-month spot rate. 2. Treat the two sides of the interest rate swap as a fixed coupon bond and a floating coupon bond as we did in class (by adding the notional to the end of the contract). Calculate the modified durations of the fixed coupon and floating coupon bonds. 3. Suppose that half a year passes. The term structure of zero-coupon yields is now Maturity r 0.5 0.01 0.015 1.5 0.02 Semi-annually compounded interest rates 1 If you entered into a fixed-for-floating contract previously (with a notional of $100), what is the value of your position now? Why did you make or lose money? (Think about this in terms of how sensitive each side of the interest rate swap is to a change in interest rates.) Part 2: Interest Rate Swaps Use the same term structure of zero-coupon yields as in Part 1. Maturity r 0.5 0.02 0.025 1.5 0.03 0.04 Semi-annually compounded interest rates 1. What is the fair fixed rate in a 2-year interest rate swap in which fixed and floating payments are exchanged every six months? Note that this is a little different from the lecture slides where payments were quarterly and the reference rate was the three-month spot rate. 2. Treat the two sides of the interest rate swap as a fixed coupon bond and a floating coupon bond as we did in class (by adding the notional to the end of the contract). Calculate the modified durations of the fixed coupon and floating coupon bonds. 3. Suppose that half a year passes. The term structure of zero-coupon yields is now Maturity r 0.5 0.01 0.015 1.5 0.02 Semi-annually compounded interest rates 1 If you entered into a fixed-for-floating contract previously (with a notional of $100), what is the value of your position now? Why did you make or lose money? (Think about this in terms of how sensitive each side of the interest rate swap is to a change in interest rates.)