Exhibit 23.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 23.7. Indicate the market value of the swap to the WallMal Company.
A)$5,786,345
B)-$3,575,987
C)$1,289,450
D)-$1,514,900
E)$1,250,075

Question

Quizplus · Accepted Answer

To calculate the market value of the swap, we need to discount the expected cash flows using the current market rates. The expected cash flows for WallMal Company are the fixed payments of 8% of the notional principal semiannually and the floating payments that depend on LIBOR rates. Using the current yield curve, we can calculate the present value of each cash flow and add them up. The market value of the swap is the difference between the present value of the fixed payments and the present value of the floating payments. Based on the given information in Exhibit 23.7 and the current yield curve, the market value of the swap is $1,289,450. Therefore, the best choice is C.

Exhibit 23.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)