Consider a two-period tree for the one-year interest rate compounded annually) where the length of a period is one year. The tree is shown below. jli 0 1 0 0.04 0.05 0.03 (a) Compute the value of a 2-year floor with strike rate K=3.6% and notional amount $1M. (The floor settles annually.) (6) Compute the fair 2-year swap rate. (c) Would a 3-year cap with the strike rate K from above, on the same notional, be more or less valuable than the floor? You may support your answer either with a precise calculation or some other reasoning. (d) A range bond is a bond that pays a fixed coupon every year, but only when the one-year market rate determined one year earlier falls in a certain range. For instance, if the range is (3.50%,5.50%), then such a bond with maturity at least 4 years pays coupon at year 4 if and only if the rate determined at year 3 is between 3.50% and 5.50%. What is the price of a 2-year range bond with coupon 7.00% and range (3.50%,5.50%)? Consider a two-period tree for the one-year interest rate compounded annually) where the length of a period is one year. The tree is shown below. jli 0 1 0 0.04 0.05 0.03 (a) Compute the value of a 2-year floor with strike rate K=3.6% and notional amount $1M. (The floor settles annually.) (6) Compute the fair 2-year swap rate. (c) Would a 3-year cap with the strike rate K from above, on the same notional, be more or less valuable than the floor? You may support your answer either with a precise calculation or some other reasoning. (d) A range bond is a bond that pays a fixed coupon every year, but only when the one-year market rate determined one year earlier falls in a certain range. For instance, if the range is (3.50%,5.50%), then such a bond with maturity at least 4 years pays coupon at year 4 if and only if the rate determined at year 3 is between 3.50% and 5.50%. What is the price of a 2-year range bond with coupon 7.00% and range (3.50%,5.50%)