An interest rate swap has three years of remaining life.Payments are exchanged annually.Interest at 3% 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 2%,3% and 4%.All rates an annually compounded.What is the value of the swap as a percentage of the principal when OIS and LIBOR rates are the same
A) 0.00
B) 2.66
C) 2.06
D) 1.06

Question

Quizplus · Accepted Answer

Suppose the principal 100.The value of the floating rate bond underlying the swap is 100.The value of the fixed rate bond is 3/1.02+3/(1.03)²+103/(1.04)³=97.34.The value of the swap is therefore 100−97.34 = 2.66 or 2.66% of the principal

An Interest Rate Swap Has Three Years of Remaining Life