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CFA Book IV, Reading 35, Question 4

He,

I have a few questions regarding end of chapter No. 4 and were hoping someone can clarify:

1) They come up with two interest rates in the answer: 1.070024 and 1.08007. Does anyone know how they derive those?

2) In the question they state “suppose you are the fixed rate payer in the swap”. But the answer contains the statement “… receive a fixed payment of…”

Thanks.

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I think you’re goign to have to wait until people catch up to you Speedy Gonzalez.

Anyone who can help me with this question regarding swaps?

Thanks.

I should be reading #35 in the next few days…in the meantime check the CFAI Errata to see if something has been corrected.

thanks, did that, but nothing in the errata on that - good luck with the readings!

I don’t have it in front of me right now, but from memory, I believe the interest rates were 6%, 6.5%, and 7%. I struggled with this one too.
1.065^2/1.06 = 1.070024
1.07^3/1.065^2 = 1.08007

These are forward rates:

1f1=one year forward rate at the end of year 1.

(1.065)^2=(1.06)*(1+1f1)
1f1=1.07002

2f1=one year forward rate at the end of year 2.
(1.07)^3=(1.065)^2 * (1+2f1)
2f1=1.08007

thanks a lot everyone!