A $10 million 1-year semi-annual-pay LIBOR-based interest-rate swap was initiated 90 days ago when LIBOR was 4.8 percent. The fixed rate on the swap is 5 percent, current 90-day LIBOR is 5 percent and 270-day LIBOR is 5.4 percent. What is the value of the swap to the fixed rate payer?
What I did:
I find that the present value of the fixed-rate payments is:
First floating rate payment = 0.048 * (180/360) = 0.024
The market value of the rest of the floating payments is 1, so the present value of all the floating rate payments is: (0.024+1) / [1+0.05*(90/360)] = 1.011358025
So if the notional is $10million then the value of the swap to the fixed-rate payer is:
Thank you people!! youve been really helpful :)). i went over the exercise again and got $15680 (rounding difference)…cash flows are the same as cpk123. i had no idea if i was close to the correct answer. thanks again
I get $20,571. Assume you pay fixed and receive float.
The fixed value now (after 3 months from initiation) = $10,097,947…basically, you will pay 5%/2 in 3 months, plus 5%/2 in 9 months, plus $10 million in 9 months.
The floating part pays $245,000 after 3 months, discounting to today = $241,975
Plus $10,000,000 due in 3 months = $9,876,543
Total floating part you will receive = $241,975 + $9,876,543 = $10,118,518
Difference = $10,118,518 - $10,097,947 = $20,571 that you will receive.
i get $15,603 so in the same ball park as most of the others. Dreary the floating part pays $240k in 3 months, i think that’s why your answer is a bit different
What you are all assuming is that the swap resets every six months, which is fair to assume since it is a semi-annual pay bond… is this always the case? I don’t know, but I think it is possible that the swap rests every 3 months even if it is a semi-annual pay…in that case, the calculation might be different.