 QUESTION

# Swap questions 1) An interest rate swap has three years of remaining life. Payments are exchanged annually.

Need help with the calculations involved in deriving the answer for the MCQ questions below.

Swap questions

1) 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

2) A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today's three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semiannual compounding. If the swap has a principal value of \$15,000,000, what is the value of the swap to the party receiving a fixed rate of interest?

A) \$74,250 B) -\$70,760 C) -\$11,250 D) \$103,790