Looking at Schweser reading 54: 1. Concept checker 9: after 180 days swap is marked to market, when 180, 360, 540 annualised libor rates are 4.5%, 5%, 6% respectively. The present value factors are 0.9780, 0.9524 and 0.9174. What is the market value of the swap per $1 notional principal. Why does the answer calculate fixed rate side as = 0.0331 x (0.9780+0.9524+0.9174) + (1 x 0.9174) note: 0.331 is the semi-annual swap rate. 2. concept checker 10, question says bank entered into a 5m, 1-year equity swap with quarterly payments 300 days ago. Bank agreed to pay an annual fixed rate of 4% and receive the return on an international equity index. For the value of the fixed rate side, why do they have: discount factor x (coupon + face). Answer says value of fixed rate side = 0.9940 x 5,050,000.
- I don’t have the question in front of me, but it looks like the fixed side is being calculated like the price of a bond with a notional value of $1 that pays coupon of 0.0331 semi-annually.
if you think about how you would value the bonds cash flows… it would be:
0.0331 * 0.9780 + 0.0331 * 0.9524 + 0.0331 * 0.9174 + 1 * 0.9174
if you factor out the 0.0331 from the first three terms, you get 0.0331 * (0.9780 + 0.9524 + 0.9174) + 1 * 0.9174
- again, I don’t have the question in front of me, but if we entered into a 1 year equity swap with a fixed side of 4% (pay quarterly), it seems that the only cash flows remaining on the fixed side are 4% / 4 * 5000000 + 5000000 = 5050000 to be paid in 60 days… hence these are the only cash flows left to value when you are marking to market the fixed side of the swap after 300 days.