simple interest or compound interest for swap?
A $10 million 1-year semi-annual-pay LIBOR-based interest-rate swap was initiated 90 days ago when LIBOR was 4.8%. The fixed rate on the swap is 5%, current 90-day LIBOR is 5% and 270-day LIBOR is 5.4%.
To calculate the value to fix-paying-investor we need the discount rate.
in the answer, it calculate discount rate like: (1 + 0.05 × (90/360))
why not (1+0.05)^(90/360)?
why use simple interest rates?
Is that assumed that for all swap related calculation is based on simple interest calculation?
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