Questions You face the following term structure of zero rates. Maturities Zero rates 0.5 0.50% 1 0.60% 1.5 0.70% 2 0.80% 2.5 0.90% 3 1.00% 3.5 1.10% 4 1.20% 4.5 1.30% 5 1.40% Table 1 1) Compute the discount factors (DFs) for each maturity in Table 1. [10 points) 2) You are working for an investment bank. A client wants to initiate a new interest rate swap with you for a notional of 200 million. They are interested to pay fixed and receive floating. The swap maturity is 3 years with semi-annual payments. What fair fixed rate S will you charge the client to enter into this new swap? [15 points) 3) Look again at exercise 2. After some consideration, you decide that there is no point in offering the client a perfectly fair swap rate. You decide that you want to make 1 million profit today on this interest rate swap. What fixed rate S will you charge the client if you want to make a 1 million profit today? [15 points] Questions You face the following term structure of zero rates. Maturities Zero rates 0.5 0.50% 1 0.60% 1.5 0.70% 2 0.80% 2.5 0.90% 3 1.00% 3.5 1.10% 4 1.20% 4.5 1.30% 5 1.40% Table 1 1) Compute the discount factors (DFs) for each maturity in Table 1. [10 points) 2) You are working for an investment bank. A client wants to initiate a new interest rate swap with you for a notional of 200 million. They are interested to pay fixed and receive floating. The swap maturity is 3 years with semi-annual payments. What fair fixed rate S will you charge the client to enter into this new swap? [15 points) 3) Look again at exercise 2. After some consideration, you decide that there is no point in offering the client a perfectly fair swap rate. You decide that you want to make 1 million profit today on this interest rate swap. What fixed rate S will you charge the client if you want to make a 1 million profit today? [15 points]