Suppose the 1year effective annual interest rate is 46 and t

Suppose the 1-year effective annual interest rate is 4.6% and the 2-year effective rate is 3.2%. Compute the fixed rate in a 2-year amortizing interest rate swap based on $440,000 of notional principal in the first year and $240,000 in the second year.

b. 4.69%

c. 4.11%

d. 3.91%

e. 3.22%

Suppose that 1-year, 2-year, and 3-year forward prices for the Australian dollar are $1.05/A$, $0.98/A$, and $0.83/A$, respectively. The 1-year, 2-year, and 3-year effective annual interest rates in the U.S. are 5.8%, 6.6%, and 6.8%. What is the fixed exchange rate in a 3-year Australian dollar swap? (In other words, what 3-year U.S. dollar annuity is equivalent to a 3-year annuity of A$1?)

b. $0.85

c. $1.12

d. $1.03

e. $0.92

Solution

Effective rate = (1 + i / n)n – 1 The two year effective rate is 3.2% 0.032 (1+i/n)^2 - 1 Solving the above we get I = 3.63%