1. The continuously compounded interest rate for a 4 year investment is Rc = 8:0% per annum. Determine the equivalent quarterly compounded rate per annum Rd and the equivalent flat (or holding) rate per annum Rf . Derive general relationships connecting Rc,Rd,Rf when Rd is compounded m times a year and the investment horizon is T years.
2. Suppose the term structure of continuously compounded interest rates, for time interval [0, t] for all 0 < t<= T, is given by the linear function R = a + bt, where a,b are positive constants. Show that the corresponding continuously compounded forward rate over [t1,t2] where 0 < t1 < t2<= T is given by f(t1,t2) = a + b(t1 + t2) Determine the corresponding instantaneous rate r(t) at time t.
3. A forward rate agreement (FRA) is a single cash flow swap at time T in the future. The cash flows are fixed and floating interest rate
payments on a given notional amount. Write down a formula for the present value of the FRA in terms of the fixed and floating rates, the notional and any other relevant parameters.
I realy don't have a clue on those question. THANKS A LOT
2. Suppose the term structure of continuously compounded interest rates, for time interval [0, t] for all 0 < t<= T, is given by the linear function R = a + bt, where a,b are positive constants. Show that the corresponding continuously compounded forward rate over [t1,t2] where 0 < t1 < t2<= T is given by f(t1,t2) = a + b(t1 + t2) Determine the corresponding instantaneous rate r(t) at time t.
3. A forward rate agreement (FRA) is a single cash flow swap at time T in the future. The cash flows are fixed and floating interest rate
payments on a given notional amount. Write down a formula for the present value of the FRA in terms of the fixed and floating rates, the notional and any other relevant parameters.
I realy don't have a clue on those question. THANKS A LOT
