A $30,000,000 interest rate swap has a 12-month maturity, and was entered 2 months ago. This means the swap has a remaining life of 10 months. The swap pays interest quarterly, and it stipulates that the fixed rate is 4.5%, while the floating rate is the 3-month LIBOR +1%. Two months ago, when the swap was entered, 3-month LIBOR was 2.9%. The 3-month LIBOR forward rates and continuous time zero-coupon prices are given in a table below. Use the zero coupon prices to discount cash-flows. 3-month LIBOR Forward Rates Term rate 1x4 2.90% 2x5 2.85% 3x6 2.84% 4x7 2.88% 5x8 2.90% 6x9 2.91% 7x10 2.92% 8x11 2.92% 9x12 2.92% Zero-Coupon prices T (month) Price 1 0.9976 2 0.9953 3 0.9929 4 0.9904 5 0.988 6 0.9856 7 0.9831 8 0.9807 9 0.9783 10 0.9761 11 0.9737 12 0.9712 (Important hint: since the swap was entered 2 months ago, and makes quarterly payments, in the remaining 10 months, payments should be expected in 1 month, 4 months, 7 months and 10 months. Discount cash flows accordingly.) 1. What is the fixed quarterly interest payment? 2. What is the value of the total fixed payments today? 3. What is value of the variable leg today? (Hint: calculate the variable value in 1 month as the variable interest payment plus the nominal value; then discount it to today.) 4. What is the market value of this SWAP for the party paying the fixed rate? (Enter a positive number for positive value, a negative number for negative value.)
A $30,000,000 interest rate swap has a 12-month maturity, and was entered 2 months ago. This means the swap has a remaining life of 10 months. The swap pays interest quarterly, and it stipulates that the fixed rate is 4.5%, while the floating rate is the 3-month LIBOR +1%. Two months ago, when the swap was entered, 3-month LIBOR was 2.9%. The 3-month LIBOR forward rates and continuous time zero-coupon prices are given in a table below. Use the zero coupon prices to discount cash-flows. 3-month LIBOR Forward Rates Term rate 1x4 2.90% 2x5 2.85% 3x6 2.84% 4x7 2.88% 5x8 2.90% 6x9 2.91% 7x10 2.92% 8x11 2.92% 9x12 2.92% Zero-Coupon prices T (month) Price 1 0.9976 2 0.9953 3 0.9929 4 0.9904 5 0.988 6 0.9856 7 0.9831 8 0.9807 9 0.9783 10 0.9761 11 0.9737 12 0.9712 (Important hint: since the swap was entered 2 months ago, and makes quarterly payments, in the remaining 10 months, payments should be expected in 1 month, 4 months, 7 months and 10 months. Discount cash flows accordingly.) 1. What is the fixed quarterly interest payment? 2. What is the value of the total fixed payments today? 3. What is value of the variable leg today? (Hint: calculate the variable value in 1 month as the variable interest payment plus the nominal value; then discount it to today.) 4. What is the market value of this SWAP for the party paying the fixed rate? (Enter a positive number for positive value, a negative number for negative value.)
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
Related questions
Question
A $30,000,000 interest rate swap has a 12-month maturity, and was entered 2 months ago. This means the swap has a remaining life of 10 months. The swap pays interest quarterly, and it stipulates that the fixed rate is 4.5%, while the floating rate is the 3-month LIBOR +1%. Two months ago, when the swap was entered, 3-month LIBOR was 2.9%. The 3-month LIBOR forward rates and continuous time zero-coupon prices are given in a table below. Use the zero coupon prices to discount cash-flows.
3-month LIBOR Forward Rates
Term rate
1x4 2.90%
2x5 2.85%
3x6 2.84%
4x7 2.88%
5x8 2.90%
6x9 2.91%
7x10 2.92%
8x11 2.92%
9x12 2.92%
Zero-Coupon prices
T (month) Price
1 0.9976
2 0.9953
3 0.9929
4 0.9904
5 0.988
6 0.9856
7 0.9831
8 0.9807
9 0.9783
10 0.9761
11 0.9737
12 0.9712
(Important hint: since the swap was entered 2 months ago, and makes quarterly payments, in the remaining 10 months, payments should be expected in 1 month, 4 months, 7 months and 10 months. Discount cash flows accordingly.)
1. What is the fixed quarterly interest payment?
2. What is the value of the total fixed payments today?
3. What is value of the variable leg today? (Hint: calculate the variable value in 1 month as the variable interest payment plus the nominal value; then discount it to today.)
4. What is the market value of this SWAP for the party paying the fixed rate? (Enter a positive number for positive value, a negative number for negative value.)
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