Question 9 (30 points) Examine the default-free yield curve information below: T t Z(0,t) Annuity Factor f(t-1,t) fair swap rate 1 2.00% 0.9804 0.9804 2.000% 2.000% 2 3.00% 0.9426 1.9230 4.010% 2.985% 3 4.00% 0.8890 2.8120 6.029% 3.948% 4 5.00% 0.8227 3.6347 8.058% 4.878% 5 6.00% 0.7473 4.3819 10.096% 5.768% 9 Assume you own $10 million of a 7-year Chevron bond and that you desire to enter into a five-year annual interest rate swap to hedge the interest rate risk of your $10 million investment in the Chevron bond. The modified duration of the Chevron bond is 6.0. This question has two parts: i) Do you want to pay a fixed rate or receive a fixed rate for the swap? (pick one, either pay fixed or receive fixed) ii) What notional principal amount should you pick for the swap? (show your work!) Format B I U .. Question 9 (30 points) Examine the default-free yield curve information below: T t Z(0,t) Annuity Factor f(t-1,t) fair swap rate 1 2.00% 0.9804 0.9804 2.000% 2.000% 2 3.00% 0.9426 1.9230 4.010% 2.985% 3 4.00% 0.8890 2.8120 6.029% 3.948% 4 5.00% 0.8227 3.6347 8.058% 4.878% 5 6.00% 0.7473 4.3819 10.096% 5.768% 9 Assume you own $10 million of a 7-year Chevron bond and that you desire to enter into a five-year annual interest rate swap to hedge the interest rate risk of your $10 million investment in the Chevron bond. The modified duration of the Chevron bond is 6.0. This question has two parts: i) Do you want to pay a fixed rate or receive a fixed rate for the swap? (pick one, either pay fixed or receive fixed) ii) What notional principal amount should you pick for the swap? (show your work!) Format B I U