Use the zero-coupon bond prices given in the following table to answer the questions that follow.
-Consider a three-year swap receiving floating paying fixed with principal of $10 million dollars,paying a fixed rate of 2 percent per year paid yearly,and receiving the one-year floating spot rate yearly.What is the value of the swap when it is issued?

Question

Use the zero-coupon bond prices given in the following table to answer the questions that follow. 
-Consider a three-year swap receiving floating paying fixed with principal of $10 million dollars,paying a fixed rate of 2 percent per year paid yearly,and receiving the one-year floating spot rate yearly.What is the value of the swap when it is issued?

Quizplus · Accepted Answer

The value of the swap is the present value of the fixed payments minus the present value of the floating payments. The fixed payments are $200,000 per year for three years, so the present value of the fixed payments is $200,000 * (1 - 1/(1+0.02)^3)/0.02 = $552,000. The floating payments are the one-year floating spot rate times $10 million, so the present value of the floating payments is $10 million * (1 - 1/(1+F1)^1)/F1, where F1 is the one-year floating spot rate. The value of the swap is therefore $552,000 - $10 million * (1 - 1/(1+F1)^1)/F1.

Use the Zero-Coupon Bond Prices Given in the Following Table