Term structure of interest rates and swap valuation Suppose the current term str
ID: 2716373 • Letter: T
Question
Term structure of interest rates and swap valuation Suppose the current term structure of interest rates, assuming annual compounding, is as follows: s1 s2 s3 s4 s5 s6 7.0% 7.3% 7.7% 8.1% 8.4% 8.8% respectively. What is the discount rate d(0,4)? (Recall that interest rates are always quoted on an annual basis unless stated otherwise.) Please submit your answer rounded to three decimal places. So for example, if your answer is 0.4567 then you should submit an answer of 0.457.
please exlpain the answer
Explanation / Answer
Discount rate, d(0,4) = 1 / (1+s4)4
= 1 / (1+8.1%)4
= 0.7323