. You plan to buy a car 3 years from now and plan to take out a 3-year car loan. Given the following yield curve and assume that the spot rates are continuous compounded, what will be the interest rate for your car loan?

Yrs to Maturity	1	2	3	4	5	6	7
% yield	4	5	6	7	8	9	10

2. Given the following treasury bonds, calculate the 18-month zero rate. Assume face value of each bond is 100 and coupons are paid semi-annually.

Bond	Yrs to Maturity	Annual coupon rate%	Bond price
A	0.5	0	98
B	1	8	98
C	1.5	9	104

3. Todays price of a 3-month t-bill futures is 958500. Today, the spot price of a 6-month t-bill is $940000. What is the implied repo rate?

4. In addition to the information in the above problem, assume a trader can actually borrow at a repo rate of 6% p.a. Show how this trader can arbitrage the disequilibrium profit using the implied repo rate method.

5. Today is Nov 3, 2010. A trader with a short t-bond futures position intends to announce his intention of delivery. Given the following 3 t-bonds in the spot market, determine which bond is the cheapest to deliver. Assume zero accrued interest, and face value of t-bond is 100000. Today settlement price of the t-bond futures is 96-16.

Maturity	Bond	Spot Price	Conversion Factor
2026	A	103-16	1. 15
2024	B	93-08	1.20
2027	C	118-00	1.10

6. Firm A desires a floating-rate loan; firm B desires a fixed-rate loan. Based on the following information, design a swap that will appear equally attractive to A and B.

	Fixed rate	Floating Rate
A	8%	LIBOR + 0.2%
B	9.4%	LIBOR + 0.6%

7. A mortgage lender currently holds a loan with a principal of $10 million. The loan generates quarterly interest incomes at LIBOR+3%. The lender is concerned that interest rates may fall. It would like to protect itself by using an interest rate swap. A swap dealer quotes a fixed rate of 7.25% if it is to pay; and a fixed rate of 7.5% if it is to receive. Explain the swap arrangements sought by the mortgage lender to achieve its objective and show the final outcome.