On March 1st, 2018, Firm A decides to enter a semi-annual, 2-year interest rate swap with Bank B, the notional being 1 million USD. The continuously-compounded interest rates on March 1st, 2018 are as below: Maturity 0.5 1 1.5 2

Interest rate 0.2107 0.1625 0.1488 0.1438

One year later, on March 1st, 2019, the continuously-compounded interest rates change to:

Maturity 0.5 1 1.5 2

Interest rate 0.5754 0.3567 0.2872 0.2554

1. On March 1st, 2018, what is the shape of the term structure of interest rates? (1%)

2. What is the name of debt obligation backed by the U.S. Treasury Department with a

maturity of six months? (1%)

3. On March 1st, 2018, what is the continuously-compounded forward rate over March 1 st, 2019 to September 1st, 2019? (2%)

4. On March 1st, 2018, if you find the forward price of six-month zero-coupon bond over March 1st, 2019 to September 1st is lower than that the fair price, describe the

arbitrage strategy using on-the-run zero-coupon bonds. (2%)

5. What is the swap rate that Firm A and Bank B agree on? (3%)

6. What is the value of the swap position for the float-rate payer on March 1st, 2019 after the exchange of payments? (2%)

7. What is the dollar duration of the swap on March 1st, 2018 after the exchange of

payments? (3%)

8. On March 1st, 2018, if Firm A enters a one-year swap contract with Bank B starting

one year from now that Firm A will pay Bank B a fixed rate on a notional of 1 million

USD on September 1st, 2019 and March 1st, 2020 in exchange for the market floating

rate, what is the forward swap rate? (3%)

9. Following Question C-8, what is the value of the forward swap contract for Firm A on

March 1st, 2019? (3%)