Company Z enters into a 5-year interest rate swap contract on 1 January 2015 as the fixed-rate payer party. The settlement period is one year. The settlement dates are 31 December of each year from 2015 to 2019. The spot rates of interest at the beginning of various years for investment horizons of t = 1,2,3, 4 and 5 years are given in the following table. t 1 Jan 2015 1 Jan 2016 1 Jan 2017 1 Jan 2018 1 Jan 2019 0.35% 0.71% 1.43% 2.05% 0.79% 0.42% 0.34% 0.47% 0.95% 0.31% 0.38% 0.57% 1.08% 1.58% 1 1.24% 1.72% 2.59% 3.24% 0.64% 1.05% 3 1.78% 2.31% 4 2.94% 3.55% 1.47% (a) Assuming a level notional amount of $1 million for the contract, determine the swap rate. (b) Suppose the contract is an accreting swap with notional amounts of $1 million, $3 million, $5 million, $7 million and $9 million. Determine the swap rate.
Company Z enters into a 5-year interest rate swap contract on 1 January 2015 as the fixed-rate payer party. The settlement period is one year. The settlement dates are 31 December of each year from 2015 to 2019. The spot rates of interest at the beginning of various years for investment horizons of t = 1,2,3, 4 and 5 years are given in the following table. t 1 Jan 2015 1 Jan 2016 1 Jan 2017 1 Jan 2018 1 Jan 2019 0.35% 0.71% 1.43% 2.05% 0.79% 0.42% 0.34% 0.47% 0.95% 0.31% 0.38% 0.57% 1.08% 1.58% 1 1.24% 1.72% 2.59% 3.24% 0.64% 1.05% 3 1.78% 2.31% 4 2.94% 3.55% 1.47% (a) Assuming a level notional amount of $1 million for the contract, determine the swap rate. (b) Suppose the contract is an accreting swap with notional amounts of $1 million, $3 million, $5 million, $7 million and $9 million. Determine the swap rate.
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
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Transcribed Image Text:Company Z enters into a 5-year interest rate swap contract on 1 January 2015
as the fixed-rate payer party. The settlement period is one year. The settlement
dates are 31 December of each year from 2015 to 2019. The spot rates of interest
at the beginning of various years for investment horizons of t = 1,2, 3, 4 and 5
years are given in the following table.
t 1 Jan 2015 1 Jan 2016 1 Jan 2017 1 Jan 2018 1 Jan 2019
0.71%
1.43%
2.05%
0.42%
0.34%
0.79%
0.35%
0.31%
0.38%
0.57%
1.08%
1.58%
1
0.64%
1.05%
1.24%
1.72%
0.47%
0.95%
1.47%
3
2.94%
2.59%
1.78%
5
3.55%
3.24%
2.31%
(a) Assuming a level notional amount of $1 million for the contract, determine
the swap rate.
(b) Suppose the contract is an acereting swap with notional amounts of $1 million,
$3 million, $5 million, $7 million and $9 million. Determine the swap rate.
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