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Floating rate bond pays annual coupons

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A three-year floating rate bond pays annual coupons of one-year Libor (set in arrears) and is capped at 5.600%. The Libor swap curve is as given in the below table (i.e, 1 year = 2.5%, 2 year =3.0%, 3 year = 3.5%, respectively), and interest rate volatility is 10%. The par value is $100. 

Maturity (year)

Par Rate (%)

Spot Rate (%)

One Year Forward Rate (%)

1

2.500

2.500

f(0,1) = 2.500

2

3.000

3.008

f(1,2) = 3.518

3

3.500

3.524

f(2,3) = 4.564

The value of the capped floater is $______________________. (Note: round to the nearest thousandths.)

Reference no: EM133112800

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