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Problem 7. You are given the following zero-coupon bond prices. P(0,1) = 0.96079, P(0,2) = 0.91393, P(0,3) = 0.86329, P(0,4) = 0.81221, P(0,5) = 0.76529,
Problem 7. You are given the following zero-coupon bond prices. P(0,1) = 0.96079, P(0,2) = 0.91393, P(0,3) = 0.86329, P(0,4) = 0.81221, P(0,5) = 0.76529, P(0,6) = 0.72325 You want to enter a five year swap with annual payments on a notional amount of $5,000,000 where you pay the floating rate leg and receive the fixed leg payments. (1) (3 points) What is the effective annual swap rate? (2) (3 points) What is the sum of the prices today (time 0) of the uncertain floating rate leg payments that will be made at the end of year 2 time 2) and at the end of year 4 time 4) under the swap? (3) (2 points) What is the two-year forward rate three years from now? (i.e. the two year rate that we can lock in three years from now based on today's yield curve.) (4) (2 points) You want to synthetically create the floating rate payment on a notional amount of 1 that will be made at time 3 under the swap agreement. Describe the transactions that you can enter into at time 0 to create this payment. Problem 7. You are given the following zero-coupon bond prices. P(0,1) = 0.96079, P(0,2) = 0.91393, P(0,3) = 0.86329, P(0,4) = 0.81221, P(0,5) = 0.76529, P(0,6) = 0.72325 You want to enter a five year swap with annual payments on a notional amount of $5,000,000 where you pay the floating rate leg and receive the fixed leg payments. (1) (3 points) What is the effective annual swap rate? (2) (3 points) What is the sum of the prices today (time 0) of the uncertain floating rate leg payments that will be made at the end of year 2 time 2) and at the end of year 4 time 4) under the swap? (3) (2 points) What is the two-year forward rate three years from now? (i.e. the two year rate that we can lock in three years from now based on today's yield curve.) (4) (2 points) You want to synthetically create the floating rate payment on a notional amount of 1 that will be made at time 3 under the swap agreement. Describe the transactions that you can enter into at time 0 to create this payment
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