# Question 118 Schweser Mock Exam No 2

Based on a notional principal of \$30 million and assuming the value of a fixed rate swap and floating rate swap of 0.99 and 1.01 respectively, what is the payment requirement to terminate the swap and which party will make the payment?

A. \$600,000 paid by the floating rate payer B. \$1,200,000 paid by the fixed rate payer C. \$600,000 paid by the floating rate payer and \$1,200,000 paid by the fixed rate payer. Answer says A but IMO should be the opposite (600 paid by the fixed rate payer). Am I wrong?

I agree it can be confusing, but keep the following in mind: The floating-rate payer, fixed-receiver always gets:

PV(remaining fixed pmts) less PV(remaining floating pmts) = 0.99 - 1.01.

Because the result is negative, he/she has to pay the other party when they net the amounts.

Kobi, you are wrong.

It says “value of the fixed-rate bond and floating-rate note are 0.99 and 1.01”. If the floating-rate is more valuable than the fixed-rate bond, the one receiving floating gets more than the one receiving fixed. Since payments are netted, the floating-rate payer has to make a payment.