Consider an interest-rate swap with maturity two periods: the long side pays fixed and receives variable at times 1 and 2 (the end of the first period and the end of the second period). Suppose the spot rates are y1=4% and y2 = 4.245%. This implies that the swap rate is 4.24%. Suppose you buy the swap today and the 1-period spot rate in one period from now turns out to be 3.5%. Calculate the cash flows generated by the contract at times 1 and 2, assuming a notional principal of M=100.

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