The client’s portfolio contains a bond with a par value of 10 million Bahraini dinar (BHD) and an annual interest rate of 5%, paid semi-annually. Based on current market conditions, Hassan would like to increase the client’s equity exposure, but prefers not to sell this bond. Ahmed suggests establishing an equity swap that would allow the client to increase equity exposure without selling the bond. Hassan sets up an equity return for fixed payment equity swap for the client with a BHD 10 million notional value and semi-annual payments. The first semi-annual period after setting up the equity swap, the underlying unannualized equity performance was –2.3% and the present value of all remaining fixed cash flows after this first payment are equal to BHD 11,187,500.
*Ans = [(1-2.3%)10,000,000] - 11,187,500. = 1,417,500.
Can someone help me understand why is it (1-2.3%) . I understand why thet are subtracting it with 11,187,500 since its the pv of the bond after the first payment but cant wrap my head around why they are subtracting 2.3% with 1