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The 6-month, 12-month, 18-month, and 24-month zero rates are 2.50%, 3.00%, 3.50%, and 4.00% with semi-annual compounding. Q1: What are the equivalent...

This question was answered on Jan 20, 2013. View the Answer
The 6-month, 12-month, 18-month, and 24-month zero rates are 2.50%, 3.00%, 3.50%, and
4.00% with semi-annual compounding.
Q1: What are the equivalent rates with continuous compounding?
Q2: What is the forward rate for the six-month period beginning in 12 months (i.e., F12,18)? If
you use Eq 4.5 or 4.6, convert the forward rate into semi-annual compounding rate.
Q3: What is the value of an FRA that pays you the forward rate in Q2 and you pay a fixed rate
of 4.25% (compounded semi-annually) on a principal of $1 million for the six-month period
starting in 12 months?
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Solution.xlsx

The Continuous compounding rates can be computed by converting these semi-annual compounding rates into annual effective rates and then converting annual effective rates into continuous compounding...

This question was asked on Jan 18, 2013 and answered on Jan 20, 2013.

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