Suppose that the term structure is described in the following table: maturity 6-month 12-month 18-month 24-month

yield 2.5% 2.75%

3.0% 3.5%

Assume that 6-month LIBOR rate is 2.5%.

• What is the market fixed rate (annualized, semiannual compounded) for a 2-
• year fixed-floating swap with semiannual payments?
• XYZ entered into such a swap as the floating-rate payer, with a notional amount of $10 million. Two months later, suppose that the yield curve becomes flat at 2.5% for all maturities and the 6-month LIBOR rate is 2.5%. What is the value of the swap to XYZ?
• If the counterpart defaults now, what is the loss to XYZ?