The current term structure of (continuously compounded) interest rates is given in Table 4.2. We want to find the swap rate for a contract maturing in two years with semiannual payments.

To find the swap rate, let us assume a nominal value of 1 (which is actually irrelevant) and solve the equation

which yields

Clearly, we may just apply Eq. (4.11) and find the same result. The swap rate \(K_{2}\) with semiannual compounding corresponds to \(K=\) 0.0299 with continuous compounding.

Data From Equation (4.11) 

Data From Table 4.2

Transcribed Image Text:

x (e-0.5x0.023+e-10.026 +e-1.5x0.028+e-2x0.03) -2x0.03 +e = 1,