Suppose you have a 2.5-year remaining on an interest rate swap with a notional principal of $10,000, 000 between Company A and Company B. Company A pays fixed rate and Company B pays the float rate. Fixed and float payments are exchanged every year and the last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and the floating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago, is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is 3.50%. Calculate the present value of the fixed and floating legs of the swap, and determine the swap's net present value from Company A's perspective. Assume annual compounding for discounting.

Suppose you have a 2.5-year remaining on an interest rate swap with a notional principal of $10,000, 000 between Company A and Company B. Company A pays fixed rate and Company B pays the float rate. Fixed and float payments are exchanged every year and the last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and the floating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago, is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is 3.50%. Calculate the present value of the fixed and floating legs of the swap, and determine the swap's net present value from Company A's perspective. Assume annual compounding for discounting.

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

5.
Suppose you have a 2.5-year remaining on an interest rate swap with a notional
principal of $10,000, 000 between Company A and Company B. Company A pays fixed rate
and Company B pays the float rate. Fixed and float payments are exchanged every year and
the last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and the
floating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,
is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is
3.50%.
Calculate the present value of the fixed and floating legs of the swap, and determine the swap's
net present value from Company A's perspective. Assume annual compounding for discounting.

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Step 1: Calculation of fixed leg payment

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Step 2: Calculation of floating leg payment

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Step 3: Calculation of discounting factor

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Step 4: Calculation of present value of swap

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