1a) Suppose the 1-year effective annual interest rate is 4.9% and the 2-year effective rate is 6.5%. Compute the fixed rate in a 2-year amortizing interest rate swap based on $460,000 of notional principal in the first year and $390,000 in the second year.

Answers: a. 5.67% b. 6.62% c. 6.32% d. 5.60% e. 6.45%

1b)

Suppose that 1-year, 2-year, and 3-year forward prices for the British pound are $1.76/£, $1.67/£, and $1.37/£, respectively. The 1-year, 2-year, and 3-year effective annual interest rates in the U.S. are 5.3%, 4.9%, and 4.7%. What is the fixed exchange rate in a 3-year British pound swap? (In other words, what 3-year U.S. dollar annuity is equivalent to a 3-year annuity of £1?)

Answers:	a. $1.97
	b. $1.80
	c. $1.46
	d. $1.61
	e. $1.86

Please provide proper explanation and formulas. Thank you!

Answer rating: 100% (QA)

1 a The correct answer is b 662 Explanation In an amortizing interest rate swap the fixed rate is determined such that the present value of the fixed ... View the full answer