4. continuously-compounded interest rate tree, with the time interval between two movements being A = 1 year: Within the framework of the Ho-Lee model, you have estimated the following t: 1 4% 3% 2% 2% 1% 0.5% Price a cap with a notional of $100 and an annually-compounded strike rate of 1%. The first cash flow of the cap is paid at t=1, and its last cash flow is paid at t=3. The cap pays its cash flows annually.
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- Suppose 1-year T-bills currently yield 3.86% and the future inflation rate is expected to be constant at 2.35% per year. What is the real risk-free rate of return, r*? ( as a percent and round your final answer to 2 decimal places.)Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 2.00% per year. What is the real risk-free rate of return, r*? The cross-product term should be considered , i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)Now explain this meaning of G(s, t) when t is less than s. We go backwards in For tDetermine the present value P that must be invested to have the future value A at simple interest rate r after time t. A = $9000.00, r = 15.0%, t = 6 months (Do not round until the final answer. Then round up to the nearest cent as needed.)Suppose the two-year interest rate is r2 with quarterly-compounding and 30/360 daycount. Suppose the price today of a ZCB maturing in 4 years is Z(0,4). Give a formula for the two-year forward two-year libor rate L0[2,4] in terms of r2 and Z(0,4).(1) What is the value at the end of Year 3 of the following cash flow stream if the quoted interest rate is 10%, compounded semiannually? (2) What is the PV of the same stream? (3) Is the stream an annuity? (4) An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds? (Hint: Think of annual compounding, when INOM = EFF% = IPER.) What would be wrong with your answers to parts (1) and (2) if you used the nominal rate of 10% rather than the periodic rate, INOM/2 = 10%/2 = 5%?Define the stated (quoted) or nominal rate INOM as well as the periodic rate IPER. Will the future value be larger or smaller if we compound an initial amount more often than annually—for example, every 6 months, or semiannually—holding the stated interest rate constant? Why? What is the future value of $100 after 5 years under 12% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding? What is the effective annual rate (EAR or EFF%)? What is the EFF% for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?Consider the following spot interest rates for maturities of one, two, three, and four years. r₁ = 4.3% 2 = 4.9% √3 = 5.6% r4 = 6.4% What are the following forward rates, where fkn refers to a forward rate beginning in k year(s) and extending for n year(s)? f2,1 = ? f3,1 = ? f2,2 = ?a) Suppose that the current one-year spot rate and expected one-year T-bill rates over the following three years (i.e., years 2, and 3 respectively) are as follows: 1R1 = 3.1%, E(201) = 4.20%, E(3r₁) = 6.6%. Using the unbiased expectation theory, calculate the current long-term rates for one- two and three-year-maturity Treasury securities and plot the current yield curve. Please show each step of your calculation. b) What are the sources of funding for commercial banks? Please also classify the sources of funding and briefly describe each category. c) The unbiased expectation theory and liquidity premium theory are two important theories to explain the shape of yield curve. Discuss and compare the two theories.Suppose we observe the following rates: 1R1 = 10%, 1R2 = 12%. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year interest rate expected one year from now, E(2r1)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)Consider a future value of $2,000, 8 years in the future. Assume that the nominal interest rate is 18.00%. Assume that there is semiannual compounding. Entering PMT=0 and a FV=$2,000 into a financial calculator, along with the appropriate periodic interest rate and value of N, yields a present value of approximately $ with semiannual compounding. Assume that there is quarterly compounding. Entering PMT=0 and a FV=$2,000 into a financial calculator, along with the appropriate periodic interest rate and value of N, yields a present value of approximately $ with quarterly compounding. Suppose now that the cash flow of $2,000 occurs only 1 year in the future. Assume that there is monthly compounding. Entering PMT=0 and a FV=$2,000 into a financial calculator, along with the appropriate periodic interest rate and value of N, yields a present value of approximately $ with monthly compounding.If the compounding frequency is monthly and the discount factor=0.62026, what is the value of the corresponding annual interest rate? What is the corresponding continuous compounding annual interest rate if the discount factor remains at 0.62026?SEE MORE QUESTIONS