Suppose that 3-month, 6-month, 12-months, 2-year, and 3-year OIS rates are 2.0%, 2.5%, 3.2%, 4.5%, and 5%,

Question:

Suppose that 3-month, 6-month, 12-months, 2-year, and 3-year OIS rates are 2.0%, 2.5%, 3.2%, 4.5%, and 5%, respectively. The 3-month, 6-month and 12-month OISs involve a single exchange at maturity; the 2-year and 3-year OISs involve quarterly exchanges. The compounding frequencies used for expressing the rates correspond to the frequency of exchanges. Calculate the OIS zero rates using continuous compounding. Interpolate linearly between continuously compounded rates to determine rates between 6 months and 12 months, between 12 months and 2 years, and between 2 years and 3 years. You may find Excel's Solver useful.

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...