# swaps

Is this right? I thought you calculated discount factors with 1/[1 + r(n/360)] If the one year spot rate is 5%, the two-year spot rate is 5.5%, and the three year spot rate is 6%, the fixed rate on a 3-year annual pay swap is closest to: A) 5.96%. B) 1.99%. C) 4.50%. Your answer: C was incorrect. The correct answer was A) 5.96%. The fixed rate on the swap is: [1-(1/1.063^3)]/[(1/1.05)+(1/1.0552^2)+(1/1.063^3)] =1-0.8396 / [0.9524 + 0.8985 + 0.8396] =0.1604/2.6905 = 5.96%

they seem to have made a mistake. calculated the way we normally do - you would get 5.65% - close enough to choice A.

agreed with CPK- shouldn’t be to the power of. all CFAI examples would take a 2 yr for example as x 720/360 i’ve moved on to “oh my god” by tribe called quest. honestly, i am going to walk into this test with my pimp step ON.

I believe you are correct. I hate the inconsistency in use of compounded rates and linear approx.

thanks, I thought I would just bang out a few swaps questions and suddenly thought I had lost my brain

You compound if its NOT libor. You use the 360 day convention if it IS libor. LIBOR is the deciding factor in using day fraction or compounding.