# Need help with fixed-for-float IR swaps

I am using the Kaplan books and I am struggling on this area, and specifically this EOC question (#9). The swap rate is 6.62% (i got that one). If you can help explain the answer to this for me or direct me to a resource that better shows the process of solving fixed for float IR I would be greatly appreciativwe.

Thanks,

Jay

Two parties enter into a 2-year fixed-for-floating interest rate swap with semiannual payments. The floating-rate payments are based on LIBOR. The 180-, 360-, 540-, and 720-day annualized LIBOR rates and present value factors are:

180-day LIBO R 360-day LIBOR 540-day LIBOR 720-day LIBOR Ri.lk 5.0% 6.0% 6.5% 7.0% Present value factor 0.9756 0.9434 0.9112 0.8772 8. The swap rate is closm to: A. 6.62%. B. 6.87%. c. 7.03%.

9. After 180 days, the swap is marked-to-market when the 180-, 360-, and 540-day annualized LIBOR rates are 4.5%, 5%, and 6%, respectively. The present value factors, respectively, are 0.9780, 0.9524, and 0.9174. What is the market value of the swap per \$1 notional principal, and which of the two counterparties (the fixed-rate payer or the fixed-rate receiver) would make the payment to mark the swap to market? Market value Payment made by A. \$0.01166 Fixed-rate payer B. \$0.04290 Fixed-rate payer C. \$0.01166 Fixed-rate receiver

on the 2nd case: PV( fixed rate party ) 0.0331 * .978 + .0331 * .9524 + 1.0331 * .9178 = 1.0116218 PV (Floating rate party) = 1.0225 * .9780 = 1,000005 fixed rate payer, floating rate receiver = -1.0116218 + 1.000005 = -0.01166 so fixed rate payer makes the payment… A)

j2534a, Check out this link. It helped me a LOT with swap valuations. Scroll down to find Jscott24’s post: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9749056 Above all else just remember you basically discounting two cash flows then netting them against each other.