Just wondering what the rationale is behind this formula …
Well the thing to remember is that the present value of the fixed rate payments is equal to the present value of floating cash flows received. So first come up with the PV of floating cash flows AT INCEPTION. The PV(floating) = 1. Why? Because on the floating case the cash flow equals the discount rate, so at every coupon reset, the PV = 1. So you set 1 equal to the present value of fixed payments. Now find the present value of fixed payments.
ah thank you I read your post and then read the book again it makes sense!