Question: Use the interest rate tree below.The first number at each node is the 0.5-year rate at that node.The next number is the price of $1

Use the interest rate tree below.The first number at each node is the 0.5-year rate at that node.The next number is the price of $1 par of a 0.5-year zero at that node.The next number, at the time 0 node, is the price of $1 par of a 1-year zero.

Interest Rate Model Time 0 4.9% 0.976086 0.952587 Time 0.5 5.526% 0.973113

a) What is the value of a 5.25% interest rate cap on $100 notional amount of a 1-year semi-annual floating rate note?

b) What is the value of $100 par of a 1-year semi-annual floating rate note that is capped at 5.25%?

c) Consider a 1-year semi-annual interest rate collar with a 5.25% cap. What floor rate makes the collar worth zero?

Interest Rate Model Time 0 4.9% 0.976086 0.952587 Time 0.5 5.526% 0.973113 4.345% 0.978737

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Solution a To calculate the value of a 525 interest rate cap on 100 notional amount of a 1year semiannual floating rate note we need to calculate the present value of the expected future cash flows of ... View full answer

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