A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six- month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730
A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six- month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730
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:A financial institution has entered into an interest rate swap with company
X.
Under the terms of the swap, it receives 5% per annum and pays six-
month LIBOR on a principal of $5 million for five years. Payments are
made every six months.
Suppose that company X defaults on the sixth payment date (end of year
3) when the six-month forward LIBOR rates for all maturities are 3% per
annum.
Assume that six-month LIBOR was 3.5% per annum halfway through year
3 and that at the time of default all OIS rates are 2.5% per annum.
OIS rates are expressed with continuous compounding; other rates are
expressed with semiannual compounding.
The loss to the financial institution is closest to:
a. $231,365
O b. $347,048
O c. $462,730
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