1. (15 marks) (a) Consider a two-year interest rate swap with semi-annual payments based on actual/360 day-count and a notional principal of $1 million. Assume that the current six-month LIBOR and the forward LIBORS for the next three periods are as follows: Current Forward No. of Days 6-Month 6-Month Period in Period LIBOR LIBOR 1 181 4.6% 2 184 5.0% 3 181 5.2% 4 184 5.6% (a) What is the swap rate for this swap? (9 marks) (b) After one year, the six-month LIBOR is 5.5% and the forward LIBOR for the next period is 6.0%. What is the value of this swap from the perspective of the floating-rate payer? (6 marks)
1. (15 marks) (a) Consider a two-year interest rate swap with semi-annual payments based on actual/360 day-count and a notional principal of $1 million. Assume that the current six-month LIBOR and the forward LIBORS for the next three periods are as follows: Current Forward No. of Days 6-Month 6-Month Period in Period LIBOR LIBOR 1 181 4.6% 2 184 5.0% 3 181 5.2% 4 184 5.6% (a) What is the swap rate for this swap? (9 marks) (b) After one year, the six-month LIBOR is 5.5% and the forward LIBOR for the next period is 6.0%. What is the value of this swap from the perspective of the floating-rate payer? (6 marks)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1.
(15 marks)
(a)
Consider a two-year interest rate swap with semi-annual payments based on actual/360 day-count
and a notional principal of $1 million. Assume that the current six-month LIBOR and the
forward LIBORS for the next three periods are as follows:
Current
Forward
No. of Days 6-Month
6-Month
Period
in Period
LIBOR
LIBOR
1
181
4.6%
2
184
5.0%
3
181
5.2%
4
184
5.6%
(a) What is the swap rate for this swap?
(9 marks)
(b) After one year, the six-month LIBOR is 5.5% and the forward LIBOR for the next period is 6.0%.
What is the value of this swap from the perspective of the floating-rate payer?
(6 marks)
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