3. Suppose that a bank has agreed to the following terms of an interest rate swap: - The notional principal is CAD 300 million and the remaining life of the swap is 11 months. - The bank pays 8% per annum, and receives three-month LIBOR. - Payments are exchanged every three months. - The swap (fixed) rate is 11% per annum for all maturities. - The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAs-based method?
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- 1. (15 marks) (a) Consider a two-year interest rate swap with semi-annual payments based on actual/360 day-count and a notional principal of $1 million. Assume that the current six-month LIBOR and the forward LIBORS for the next three periods are as follows: Current Forward No. of Days 6-Month 6-Month Period in Period LIBOR LIBOR 1 181 4.6% 2 184 5.0% 3 181 5.2% 4 184 5.6% (a) What is the swap rate for this swap? (9 marks) (b) After one year, the six-month LIBOR is 5.5% and the forward LIBOR for the next period is 6.0%. What is the value of this swap from the perspective of the floating-rate payer? (6 marks)V5. Suppose that some time ago a financial institution agreed to receive 6-month LIBOR and pay 4% per annum (with semi-annual compounding) on a notional principal of $200 million. The swap has a remaining life of 1.25 years; assume that the payments are to be exchanged every 6 months. The LIBOR rates with continuous compounding for 3-month, 9-month, and 15-month maturities are 3.8%, 4.2%, and 4.4%, respectively. The 6-month LIBOR rate at the last payment date was 3.9% (with semiannual compounding). Suppose that the day count convention is ignored. Calculate the current value of the swap (in terms of bond prices) to the financial institution.An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 5% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 4%, 5% and 6%. All rates are annually compounded. What is the value of the swap as a percentage of the principal ($100) when OIS and LIBOR rates are the same? (
- 6. Consider a credit default swap initiated on April 1, 2012. The notional principal amount is $100 million. The premium payments are made annually at a rate of 180 basis points per year. The swap will last for 5 years. Suppose that default event occurs on December 31, 2014. The recovery rate is 65%. Then the accrual payment is equal to ___________. a. $0b. $1,200,000c. $1,350,000d. $4,400,000e. $35,000,000An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 2% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 5%. All rates are annually compounded. What is the value of the swap as a percentage of the $100 principal value?A KIMEP BANK quotes you and interest rate of 12,5% per annum with semiannual compounding. What is the equivalent rate with annual compounding and continuous compounding? Choose the right answer: a. The rate with annual compounding is 12.89% and the rate with continuous compounding is 12.12% b. The rate with annual compounding is 12.12% and the rate with continuous compounding is 9.57% c. The rate with annual compounding is 10.28% and the rate with continuous compounding is 12.89% d. The rate with annual compounding is 10.38% and the rate with continuous compounding is 12.12%
- An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 4% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three- year LIBOR/swap zero rates are 3%, 4% and 5%. All rates an annually compounded. What is the value of the swap if LIBOR discounting is used. O 2.58 O 5.47 2.06 O 1.06A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today’s three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding. If the swap has a principal value of $15,000,000, what is the value of the swap to the party receiving a fixed rate of interest? Assume OIS rates are the same as LIBOR rates.A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today’s three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding. If the swap has a principal value of $15,000,000, what is the value of the swap to the party receiving a fixed rate of interest? Assume OIS rates are the same as LIBOR rates. Please show how you get the floating payments
- 2. A company can invest funds for five years at LIBOR minus 40 basis points. The five-year swap rate is 4.5%. What fixed rate of interest can the company earn by using the swap?Ay 2. Suppose two firms enter into a 4-year credit default swap on in March 2021. Assume the notional principal is $125 million and the buyer agrees to pay 80 basis points per annum with payments being made quarterly. How much is each quarterly payment for the buyer and how much will the buyer pay after four years of quarterly payments if there is no credit event?A bank has iss6a six month 1 million negotiated CD with a 0.72 percent annual interest rate. Thus at maturity (182 day) the CD holder will receive (check photo) in six months in exchange for $1 million deposited in the bank today. Immediately after the CD is issued, the secondary market price on the $ 1 million CD falls to $999,651. What is the secondary market yield on the $ 1 million face value of the CD?