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Suppose that you want to enter a 3-year swap such that interest payments are made semiannually and netted. Assume the zero-coupon yield curve is described by the following equation rt = 0.02 + 0.015 ln(1 + t) where rt is the continuously compounded zero-coupon rate on a t-year bond.
(a) Based on this zero-coupon yield curve, compute 3-year swap rate assuming the fixed rate is set such that the initial value of the swap is zero.
(b) Assume that you entered a 3-year swap two months ago when the yield curve was as specified above. Interest rates have changed and the current yield curve is rt = 0.03 + 0.02 ln(1 + t) Compute the new value of the swap assuming you are paying fixed and receiving floating.
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