# 180/360 or 360/360

A pays LIBOR to B

B pays Fixed 8% to A

at t=0 libor=9%

at t=1 libor=7%

at t=2 libor=10%

Given the above , which of the following statements is CORRECT? At time period 2:

A)

B pays A \$1 million.

B)

A pays B \$2 million.

C)

A pays B \$7 million and B pays A \$8 million.

how to calculate,

i was calculating  B pays (0.08-0.07)*1/2*100,000,000=500,000,

where as answer is taking  B Pays (0.08-0.07)*360/360*100,000,000=1 million , why it is taking 360/360 & why not 180/360

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How often does the swap pay?  Annually or semiannually?

Simplify the complicated side; don't complify the simplicated side.

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Nothing of that sort is given. But the explanation given as follows.

The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the appropriate variable rate is 7%, the fixed rate is 8%, and the interest payments are netted. The fixed-rate payer, counterparty B, pays according to:

(Swap Fixed Rate - LIBORt-1)(# of days/360)(Notional Principal).

In this case, we have (0.08 - 0.07)(360/360)(\$100 million) = \$1 million

but why is it taking 360/360 ?

Because it pays annually.

Simplify the complicated side; don't complify the simplicated side.

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ok s2000magician. thanks.

You’re welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/