Question

Assume that you have entered into a swap agreement for a notional of 100M USD under which every 6 months you agree to pay LIBOR and receive 4% fixed. On the date you signed the contract LIBOR is 3%. Six months later LIBOR is 3.5%. Your actual payment net of what you receive at the first payment date equals to (negative sign means you receive):

Answer 1

Answer:

0.25 Million

Explanation:

This is a situation of Interest rate swap in which I have entered in a agreement  that I will receive a Fixed interest rate of 4% and I will pay the floating interest rate. Net of Both will be a payment or receipt for me. If the floating rate will be higher than the fixed rate, then I have to pay for the difference and If the floating rate will be lower than the Fixed Rate I will receive the net amount.

after 6 months

Fixed Rate = 4%

Floating rat = LIBOR = 3.5%

Net Payment / receipt after 6 month = LIBOR - Fixed Rate = 3.5% - 4.0% = -0.5%

I will have receipt of 0.5%

Amount to be received = 100 M x 0.5% x 6/12 = 0.25 M