PLEASE ANSWER #8

on the 1-year spot rate as of the beginning of that year. At the end of four years, the company will pay the 4th year's interest and repay the principal of 200 million Suppose on the date of the loan the yield curve is as follows Years to maturity tk (annual effective) Spot Rate rt 6.25% 6.50% 6.75% 7.00% The company arranges an interest rate swap in order to eliminate the uncertainty about the amounts of future interest payments. Since the loan interest rate for the first year is known to be 6.25% the company decides there is no risk that needs to be hedged during the first year. Therefore, the company enters into a one-year deferred interest rate swap covering the interest payments at the end of years 2, 3, and 4 Problem 7 Calculate the annual effective one-year deferred fixed swap rate Problem 8 Suppose at the end of the 1st year of the swap agreement the company decided to close its position in the deferred swap agreement and suppose that at that time the yield curve is: Spot Rate ris (annual effective) 7.05% 7.30% 75% Years to maturity tk Calculate the market value of the swap at the end of the 1st year on the 1-year spot rate as of the beginning of that year. At the end of four years, the company will pay the 4th year's interest and repay the principal of 200 million Suppose on the date of the loan the yield curve is as follows Years to maturity tk (annual effective) Spot Rate rt 6.25% 6.50% 6.75% 7.00% The company arranges an interest rate swap in order to eliminate the uncertainty about the amounts of future interest payments. Since the loan interest rate for the first year is known to be 6.25% the company decides there is no risk that needs to be hedged during the first year. Therefore, the company enters into a one-year deferred interest rate swap covering the interest payments at the end of years 2, 3, and 4 Problem 7 Calculate the annual effective one-year deferred fixed swap rate Problem 8 Suppose at the end of the 1st year of the swap agreement the company decided to close its position in the deferred swap agreement and suppose that at that time the yield curve is: Spot Rate ris (annual effective) 7.05% 7.30% 75% Years to maturity tk Calculate the market value of the swap at the end of the 1st year