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 dollar 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 dollar 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 3-year bid price of a dollar swap quoted against flat USD LIBOR, we need to add the bid rate for the 3-year zero coupon bond to the current 3-year swap spread. Looking at the chart, we can see that the bid rate for the 3-year zero coupon bond is approximately 4%. Adding this to the current 3-year swap spread (which is typically around 50 basis points, or 0.5%), we get a bid price of around 4.5%. Since we are the swap bank in this scenario, this means we would be willing to pay 4.5% in euro against receiving USD LIBOR. Therefore, the best choice is B, or 4%.

Suppose That You Are a Swap Bank and You Notice