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LuckyWell [14K]
3 years ago
5

A 3-year interest rate swap has a level notional amount of $300,000. Each settlement period is one year and the variable rate is

the one-year spot interest rate at the beginning of the settlement period. The current spot rate is determined by the following prices for zero-coupon bonds with $1 face amount:
Time of Maturity 1 Year 2 Year 3 Year 4 Year 5 Year
Price 0.97 0.93 0.88 0.82 0.75

Required:
a. Calculate the swap rate.
b. Caleulate the net swap payment at the end of the first year.
c. One year has elapsed and the one-year spot interest rate at the start of year 2 is 4.45%. Calculate the net swap payment at the end of the second year for the payer.
d. Two years have elapsed and the one-year spot interest rate at the start of year three is 5.25 Calculate the market value of the swap.
Business
1 answer:
tankabanditka [31]3 years ago
4 0

Answer:

(a)0.04317 (b) 3672 which will be paid by the payer to the receiver (c) -399. so, the 399 which will be paid by the receiver to the payer (d) 2659.38

Explanation:

Solution

(a) Swap Rate (R) = (1 - P₃)/(P₁+P₂+P₃)

= (1 – 0.88)/(0.97 + 0.93 + 0.88)

= 0.04317

(b) The payer pays the fixed interest rate and gets the variable interest rate.

Then, the fixed interest rate is known as the  swap rate which is 4.317%.

Now,

The variable rate is the one year spot rate for the first year of the loan. which is r₁ = 1/P₁ -1 = 1/0.97 - 1 = 0.03093

Thus,

The net swap payment becomes (300,000)(0.04317) - (300,000)(0.03093) = 3672 which will be paid by the payer to the receiver.

(c) The payer pays the fixed interest rate and receives the variable interest rate. The fixed interest rate is the swap rate which is 4.317%.

Thus,

The variable rate is the one year spot rate for the second year of the loan is 4.45%.

So,

The net swap payment becomes (300,000)(0.04317) - (300,000)(0.04450) = -399.

Therefore, the 399 which will be paid by the receiver to the payer.

(d) The market value is the present value of expected future cash flows. under this swap, the variable rate has been swapped for the constant swap rate. There is one year left under the swap.

Then,

The expectation is that the swap owner will pay (300,000)(0.04317) and receive (300,000)(0.0525). these payments would be made at the end of one year. Therefore, the market value will be:

{(300,000)(0.0525) - (300,000)(0.04317)}/1.0525 = 2799/1.0525 = 2659.38

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Answer:

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Answer:

Hello the required attached file is missing and attached to the answer is the file and the Excel solution to the problem

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Explanation:

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105.393077268964

42.3098881077021

72.9272996471264

73.4634922485566

92.1699337998871

73.9350879887934

62.634502632427

75.1440792958601

78.2438873505453

132.73330654949

56.5183781366795

83.8099039759254

85.089108273969

79.8164036899107

87.0501152751967

41.0291376686655

63.5085725155659

84.9410880112555

59.0508206590312

56.5433210288757

59.7236421020352

65.8728722049273

73.6344772524899

49.9832039570902

47.852667143452

92.3204551730305

74.595608515956

66.5629058351624

32.4733391101472

97.4920239462517

74.2992041926482

9.96752891689539

85.1971107698046

110.769009501673

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