 # 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

How often does the swap pay? Annually or semiannually?

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.

ok s2000magician. thanks.

You’re welcome.