Question: Question 4(30 marks) a) Explain how to construct a swap using a floating-rate bond and a fixed-rate bond. b) Consider the swap as in

Question 4(30 marks) a) Explain how to construct a swap using a floating-rate bond and a fixed-rate bond. b) Consider the swap as in Example 7.3 and Example 22.2 (in Jarrow & Chatterjea (2013)). Now, assume that the payments are made every six months. Zero- coupon bond prices (maturing every six months) are given in the following table: Zero-Coupon Bond Prices Time to Maturity (in Years) Zero-Coupon Bond Prices B(0, T) 0.5 B(0,0.5) 0.99 1.0 B(0,1.0) 0.97 1.5 B(0,1.5) 0.95 2.0 B(0,2.0) 0.93 2.5 B(0,2.5) 0.91 3.0 B(0,3.0) 0.88 Compute the value of this swap.

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