Need help with Question 1 (a)

1. {star} Today is year B. You are told that the evolution of future discount Functions can be described by the Following tree diagram. The rst number at each node is the price of a zero coupon bond that matures in one year. The second number at each node is the price of a zero coupon bond that matures in two years. The third number at each node is the price of a zero coupon bond that matures in three years. The fourth number at each node is the price ofa aero coupon bond that matures in four years. The fth number at each node is the price of a zero coupon bond that matures in ve years. its you can see From the tree. as time passes zero coupon bonds with the longest maturity are dropped from the tree. Consider the terms of the following plain vanilla interest rate swap. The swap matures in 5 years. The notional amount is EFLDICK]. The net coupon payments are made once per year. The rst net coupon payment occurs on year 1. The floating coupon rate in year t is equal to the annually compounded one year rate that is announced in year E L In order for this swap to have zero present value as of year E], the coupon yield for the For-ed payments is set to l.'29TlE% [annually compounded}. Party A agrees to pay xed and receive oating. Party 3 agro- to pay oating and receive xed. Part a. 1|verify that the appropriate fixed rate for this swap is approximately 10.30%. {You will not get l.29?15% because of rounding error.)