Suppose that todays forward-rate curve for quarterly compounding is flat at 2% and one year later it will remain flat yet at 3%.

3. Suppose that you long a payer's swap today for $1m notional value and 10-year matu- rity (a) (4) What should be the swap rate? (b) (4) When the par yield curve is flat, show that 1- (1+ s(T)/2)-27 s(T /:)P where s(T) is the swap rate for the T-year swap. (c) (4) One year later, what will be the MtM value the swap (which then will have 9-year maturity)? Try to utilize the formula in 3(b) 3. Suppose that you long a payer's swap today for $1m notional value and 10-year matu- rity (a) (4) What should be the swap rate? (b) (4) When the par yield curve is flat, show that 1- (1+ s(T)/2)-27 s(T /:)P where s(T) is the swap rate for the T-year swap. (c) (4) One year later, what will be the MtM value the swap (which then will have 9-year maturity)? Try to utilize the formula in 3(b)