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solution

The following information is available on a three-year swap contract. Oneyear maturity zero-coupon discount yields are currently priced at par and pay a coupon rate of 5 percent. Two-year maturity zero-coupon discount yields are currently 5.51 percent. Three-year maturity zero-coupon discount yields are currently 5.775 percent. The terms of a three-year swap of $100 million notional value are 5.45 percent annual fixed-rate payments in exchange for floating-rate payments tied to the annual discount yield.

a. If an insurance company buys this swap, what can you conclude about the interest rate risk exposure of the company’s underlying cash position?

b. What are the realized cash flows expected over the three-year life of the swap?

c. What are the realized cash flows that occur over the three-year life of the swap if  percent and  percent?

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