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12 January, 02:44

An interest rate swap has 3 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 1 year, 2 years and three years 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?

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Answers (2)
  1. 12 January, 02:52
    0
    2.66% of the principal.

    Explanation:

    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.
  2. 12 January, 03:10
    0
    Answer: 2.66%

    Explanation:

    Let the principal be 100. Then 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.
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