Suppose the 1-year and 2-year OIS rates are 2% and 4%, respectively. Consider an OISswap with two years to maturity where you receive 3% and pay the floating reference ratewith principal 1 million. If the payments are made annually with annual compounding, what is the value of the swap

Suppose the 1-year and 2-year OIS rates are 2% and 4%, respectively. Consider an OISswap with two years to maturity where you receive 3% and pay the floating reference ratewith principal 1 million. If the payments are made annually with annual compounding, what is the value of the swap

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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Suppose the 1-year and 2-year OIS rates are 2% and 4%, respectively. Consider an OIS
swap with two years to maturity where you receive 3% and pay the floating reference rate
with principal 1 million. If the payments are made annually with annual compounding, what is the value of the swap

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Your client is invested in a registered indexed-linked annuity (RILA). The RILA contains a 7% floor, an 80% participation rate, and an overall cap rate of 10%. Suppose in years one and two, the S&P 500 returns 12% and -10%, respectively. What interest rate would be credited to the RILA during these two years? A) Year 1: 10% / Year 2: -7% B) Year 1: 9.6% / Year 2: -7% C) Year 1: 9.6% / Year 2: -3% D) Year 1: 9.6% / Year 2: -10%
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Although annual compounding-interest compounded once per year-is very common and an instructive way to introduce future value calculations, other compounding periods are possible. For example, semiannual compounding involves interest compounded twice per year. In such a scenario, you must consider the periodic interest rates and the number of compounding periods. For annual compounding, it is simple the periodic interest rate is the same as the stated nominal interest rate and the number of compounding periods is simply equal to the number of years. However, under semiannual compounding, the periodic interest rate is calculated as: Periodic rate Stated annual rate Number of payments per year For semiannual compounding, this means you would divide the stated annual rate by two. The number of periods is calculated as: Number of periods (Number of years) x (Periods per year) For semiannual compounding, this means you would multiply the number of years by two to get the total number of…
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