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.

j\i	0	1
0	0.03	0.04
1		0.02

(a) Compute the value of a 2-year floor with strike rate K=2.6\% and notional amount $1M. (The floor settles annually.)

(b) Compute the fair 2-year swap rate.

(c) Would a 2-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 (2.50%,4.50%), 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 2.50% and 4.50%. What is the price of a 2-year range bond with coupon 6.00% and range (2.50%,4.50%)?