XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SFr10,000,000 and receive LIBOR −½ percent.As of the third reset date (i.e.,midway through the 6-year agreement),calculate the price of the swap,assuming that the fixed-rate at which XYZ can borrow has increased to 10 percent.
A)SFr248,685
B)SFr900,000
C)SFr2,700,000
D)SFr7,300,000

Question

Quizplus · Accepted Answer

The price of the swap can be calculated by determining the present value of the difference between the fixed payments XYZ Corporation is committed to making and the floating payments it expects to receive. Since the fixed-rate XYZ can borrow at has increased to 10%, this implies that the fixed rate it agreed to pay (9%) is now more favorable. The calculation involves discounting the future net cash flows of the swap (the difference between the 9% fixed payments and the expected LIBOR - ½% payments) back to the present value using the new borrowing rate. The specific amount (SFr248,685) would be derived from such a calculation, taking into account the remaining term of the swap, the notional amount, and the difference in interest rates.

XYZ Corporation Enters into a 6-Year Interest Rate Swap with a Swap