Spot Rates and Forward Rates
Can someone please explain how to derive the spot rates and forward rates if the yield rates are given.
Can someone also please explain in detail, how to solve the problem mentioned below.
A 3 year floating rate bond pays annual coupons of one year LIBOR (set in arrears) and is capped at 5.6%. The one year, two year and three year par yields are 2.5%, 3% and 3.5% respectively and interest rate volatility is 10%. The value of capped floater is closest to:
Just for your information I am also telling you that the answer is A (100.000). I just need the explanation for the answer.
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