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D) 2.1203% E) 2.3985% 2. Assume normally distributed yield changes. The current level of yield is 4%. With a probability of 95%, the range for the future yields has been determined to be [1.8%; 6.2%]. It follows that the annual standard deviation of yields is __________ and the corresponding daily variance of yields is __________ percentages squared, assuming there are 365 calendar days in a year. A) 27.5%; 2.07 B) 27.5%; 0.207 C) 27.5%; 0.000207 D) 55%; 0.000829 E) 55%; 8.29 3. Use the following daily yield observations to construct a 5-day moving average equal weight volatility forecast for Day 5, assuming that the expected value of the daily change in yield is zero. The daily yield changes are assumed to be continuously compounded. Here, volatility refers to standard deviation . Day Yield (%) 0 4.380 1 4.393 2 4.430 3 4.428 4 4.522 5 4.648 A) 1.5209% B) 1.6120% C) 1.7860% D) 1.8870% E) 1.9799% Please use the following information to answer Questions 4 – 6 . Interest rate (in %) Interest rate (in %) r 0 3.5000 r 2,LL 3.7492 r 1,H 5.9196 r 3,HHH 12.0003 2
r 1,L 3.9680 r 3,HHL 8.0441 r 2,HH 8.3440 r 3,HLL 5.3921 r 2,HL 5.5931 r 3,LLL 3.6144 Consider a floating-rate note (or floater) with a floor of 4%. This floater has a maturity of 4 years and a par value of \$100. The coupon rate (paid annually) on this floater is the 1-year forward rate flat (i.e., no margin over the reference rate, which is the 1-year forward rate). Remember that for floaters the coupon interest is paid in arrears, i.e., the coupon rate is set at the beginning of the year but paid at the end of the year. Please keep at least 4 decimal places in both your

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