CFA Schweser end of CPTR Q9 P114

CFA Level II Portfolio Management
#1

Hi,

I cant get my head around why the notional is brought in the calculation. My undrestanding was if its not FX swap, the principle is not transacted, so why do do we need to have the underlined area (please see attached)?

Question: http://s33.postimg.org/f3qcyz14f/Capture1.jpg

Ans:http://s33.postimg.org/9uvc13ipb/Capture2.jpg

if the link didnt work, the question first finds the fixed rate, then given the new economy data at mark to market date, takes the deannulaized fix rate (.03310), notional =1 and:

Value for Fix rate side = [.0331X1X(z1+z2+z3+z4)]+(1Xz4)=1.01166

value for float is 1

so net is .01166

my question, why isnt the net simply : [.0331X1X(z1+z2+z3+z4)]

Thanks in advance!

A

#2

Because you value the swap replicating a bond valuation, the last bit of your formula is related with the payment of the notional.

#3

The notional in this case is 1 but imagine is 25M, the value will change