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The one year spot interest rate is 5%. The two and three year spot rates are 5.5% and the four year spot rate is 6%.

The one year spot interest rate is 5%. The two and three year spot rates

are 5.5% and the four year spot rate is 6%. What is the fair swap rate for a

4 year fixed-for-floating swap, assuming a notional principal of $ 10 million

and annual payments? Explain why the rate that you have derived is ‘fair’

to both counterparties.

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