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

Question

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

Quizplus · Accepted Answer

To calculate the swap rate, we need to discount the cash flows of the floating leg and fixed leg of the swap using the zero-coupon bond prices. We can use the following formula to calculate the swap rate:

Swap rate = (PV of fixed leg - PV of floating leg) / PV of floating leg

PV of fixed leg = $10M x (1 - Bond price for a 3-year zero-coupon bond) = $10M x (1 - 0.7493) = $2.507M
PV of floating leg = $10M x (Bond price for a 2-year zero-coupon bond - Bond price for a 1-year zero-coupon bond) = $10M x (0.9685 - 0.9825) = $-140K (negative because the swap receives floating)

Swap rate = ($2.507M - (-$140K)) / (-$140K) = 18.05 or 0.03623 (rounded to five decimal places)

Therefore, the answer is C) 0.03623.

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