Suppose that you want to enter a 3-year swap such that interest payments are made semiannually and netted. Assume the zero-coupon yield curve is described by the following equation rt = 0:02 + 0:015 ln(1 + t) 2 where rt is the continuously compounded zero-coupon rate on a t-year bond.

(a) Based on this zero-coupon yield curve, compute 3-year swap rate assuming the xed rate is set such that the initial value of the swap is zero.

(b) Assume that you entered a 3-year swap two months ago when the yield curve was as speci ed above. Interest rates have changed and the current yield curve is rt = 0:03 + 0:02 ln(1 + t) Compute the new value of the swap assuming you are paying xed and receiving floating.

5. (30 points) Suppose that you want to enter a 3-year swap such that interest payments are made semiannually and netted. Assume the zero-coupon yield curve is described by the following equation 0.02+0.015ln(1t) where rt is the continuously compounded zero-coupon rate on a t-year bond. (a) (10 points) Based on this zero-coupon yield curve, compute 3-year swap rate assuming the fixed rate is set such that the initial value of the swap is zero. (b) (20 points) Assume that you entered a 3-year swap two months ago when the yield curve was as specified above. Interest rates have changed and the current yield curve is r0.03+0.02 ln(1 +t) Compute the new value of the swap assuming you are paying fixed and receiving floating