# This flashcard is just one of a free flashcard set. See all flashcards!

95

An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the swap as a percentage of the principal when LIBOR discounting is used.

A. 0.00

B.2.66

C. 2.06

D.1.06

A. 0.00

B.2.66

C. 2.06

D.1.06

Answer: B

Suppose the principal 100. The value of the floating rate bond underlying the swap is 100. The value of the fixed rate bond is 3/1.02+3/(1.03)2+103/(1.04)3=97.34. The value of the swap is therefore 100−97.34 = 2.66 or 2.66% of the principal

Suppose the principal 100. The value of the floating rate bond underlying the swap is 100. The value of the fixed rate bond is 3/1.02+3/(1.03)2+103/(1.04)3=97.34. The value of the swap is therefore 100−97.34 = 2.66 or 2.66% of the principal

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015