Use the Zero-Coupon Bond Prices Given in the Following Table

question 6

Multiple Choice

Use the zero-coupon bond prices given in the following table to answer the questions that follow.
-Consider a three-year swap paying floating receiving fixed with principal of $10 million dollars,paying a fixed rate of 2 percent per year paid yearly,and using the one-year floating spot rate paid yearly.How would one synthetically construct the swaps payoff at time 3 using FRAs and zero-coupon bonds? (Hint: use the answer to question 10. )

• A) long a $10 million notional FRA maturing at time 3 and long 22,222 zero-coupon bonds maturity at time 3
• B) long a $10 million notional FRA maturing at time 3 and long 20,000 zero-coupon bonds maturity at time 3
• C) short a $10 million notional FRA maturing at time 3 and short 22,222 zero-coupon bonds maturity at time 3
• D) short a $10 million notional FRA maturing at time 3 and short 20,000 zero-coupon bonds maturity at time 3
• E) long a $10 million notional FRA maturing at time 3 and short 22,222 zero-coupon bonds maturity at time 3

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Definitions:

Outstanding Liabilities

Financial obligations or debts that a company has yet to pay off. These are recorded on the company's balance sheet.

Net Income and Losses

The total profit or loss a company experiences over a specific period, calculated as total revenues minus total expenses.

Liquidation

The process of winding up a company's financial affairs by selling off its assets to pay off its debts, ultimately leading to the company's dissolution.

Installment Program

A payment plan allowing customers to purchase goods by making a series of payments over time until the total debt is paid.