Consider one year as one period. Assume that the 1-year and 2-year spot rates are 2% and 2.2%, respectively. Assume that one year from now, the 1-year spot rate will be either 1.8% or 2.5% with equal probability. What is the value of a 2-year floating rate note with annual coupon rate set to equal to the 1-year interest rate plus 1%? Assume all rates are annual compounding and the floating rate note has $1,000 par.

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Expected the 1year spot rate one year from now 1805 2505 215 Annual c... View the full answer