1. Consider a two year bond with a 4% annual coupon and a face value of $100. The current yield is 4%.

1) What is the price of the bond?

2) What is the Duration of the bond?

3) If the yield rises to 5%, what is the bond price according to Duration?

2. Consider the following interest rates

Company A Company B

US Dollars - Floating LIBOR + 0.5% LIBOR + 1.0%

Canadian Dollars - Fixed 5.0% 6.5%

Company A wants to borrow US dollars at a floating rate, while Company B wants to borrow Canadian dollars at a fixed rate. The principal amounts underlying the swap are $1,000,000 USD and $1,000,000 CDN dollars.

1) Design a swap that lowers both their interest rates by 0.20%. Have the intermediary assume all currency risk.

2) What are the intermediary's cashflows in USD and CDN every period?

3) Is the intermediary long or short CDN?

3. Suppose the term structure of interest rates is at in both the US and Australia at 7% and 9% respectively (continuously compounded zero rates - use exponential formula for discounting). The current exchange rate is 0.62 USD/ AUD. The swap is for two more years with annual payments involving paying 8% (annually) in AUD and receiving 4% (annually) in USD. The principal amounts are $12 million USD and $20 million AUD.

1) Is the swap long or short a US bond? What about an AUD bond?

2) Value the swap in USD.