Reference no: EM131321399

Problem 1

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

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.