Swap Fixed Rate
Pretty simple question but I’m simply stuck on calculating a swap curve from spot rates. I know the answer is simple but I’m at my wits end.
I’m using CFAI L2 material at the moment, volume 5 page 28. The example is creating a swap curve from spot rates.
Given a spot rate for year 1 (5%) and year 2 (6%) the formula to solve is as follows
(SFR2/1.05) + (SFR2/(1.06)2) + 1/(1.06)2 = 1
I get to through the 1st step and end up with (SFR2/1.05) + (SFR2/(1.06)2) = 0.110004
But, it’s here that no matter how I think I should solve it, I can’t figure out what i’m doing wrong. Multiplying both sides of the equation by (1.06)2 and then doing the same with 1.05 ends up with values that are higher than the actual result of 5.97%
When someone has a moment, would you walk me through the algebra related to this? I have a big blind spot here.
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