What is the continuously compounded zero rate for all maturities?O (a) 12.00%O b) 11.80%O0 11.71%O (d) 11.63%O @ 11.53% Use the following information for questions 12-15:Under the terms of an interest rate swap, a financial institution has agreed topay 10% per annum and to receive the 3-month LIBOR in return on a notionalprincipal of $50 million with payments exchanged every 3 months. The swaphas a remaining life of 14 months. The current rate being swapped for 3-month LIBOR is 11.8% per annum for all maturities. The 3-month LIBOR rate1 month ago was 12% per annum. All rates are compounded quarterly.

The question is based on the concept of interest rate swap. One stream of future interest payments is exchanged for another based on a predetermined principal amount via the derivative contract known as a "swap." The current case is an example of a fixed to floating interest rate swap, but the conversion of quarterly compounding interest rates to continuously compounded zero rate doesn't have any need for a swap valuation aspect. The correct discount rate is 12% per annum with quarterly compounding. Formula to convert discrete quarterly compounding to continuous. Rc=4*ln(1+r/4) = 4*ln(1+12%/4)=4*ln(1.03)=4*0.0295=0.118 i.e 11.80% Option B. 11.80%

Answered: What is the continuously compounded…

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What is the continuously compounded zero rate for all maturities? O (a) 12.00% O b) 11.80% O0 11.71% O (d) 11.63% O (e) 11.53%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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