Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. In other words, what you be willing to pay in euro against receiving USD LIBOR?
A)5%
B)4%
C)3%
D)2%

Question

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.  In other words, what you be willing to pay in euro against receiving USD LIBOR?
A)5% 
B)4% 
C)3% 
D)2%

Quizplus · Accepted Answer

To calculate the bid price of the euro swap quoted against flat USD LIBOR, we need to set the fixed rate on the swap equal to the present value of the fixed leg of the swap, which is the 3-year zero coupon bond rate in euros. Based on the interest rates given, the 3-year euro zero coupon bond rate is 2%. However, the swap bank needs to earn a spread to make a profit, so it would bid below the market rate. Assuming the spread is 1%, the bid rate would be 3%. Therefore, the best choice is C) 3%.

Suppose That You Are a Swap Bank and You Notice