Problem Set 2 Problem 1 (20 points) Mat. Date Rate(%) 1/15/2017 0.5 4/15/2017 0.6 7/15/2017 0.75 10/15/2017 1.0 1/15/2018 1.25 4/15/2018 1.5 7/15/2018 1.75 10/15/2018 2.0 1/15/2019 2.1 4/15/2019 2.2 7/15/2019 2.3 10/15/2019 2.4

Problem Set 2

Problem 1 (20 points)

                Table 1: Continuously compounded zero rate

As of 10/15/2016, Table 1 gives continuously compounded zero rates for the corresponding quarterly maturity dates.  Using this data:

a)     Derive the present value factors as of 10/15/2016 for these dates.

b)    As of 10/15/2016 (trade date), derive the corresponding fixed rate on a 3-year interest rate swap where fixed is exchanged for floating.  Assume that both the fixed and floating payments are made twice a year. Assume that there is no difference between trade date and effective date, and that the payments fall on the corresponding semi-annual maturity dates with no adjustment for holidays.  Finally, assume that the rates are paid on a 30/360 basis. 

c)     Using the same information as in b), show all the payments on the three-year interest rate swap where you pay the annual three-year fixed swap rate and receive the 6-month floating rate.  List expected payments at the forward rates when the floating payments are not known on the trade date.  Assume a notional of $50 Million on the swap.