1 (a) Suppose that a financial institution has agreed to pay 6-month LIBOR and (40 marks) receive 4% per annum (with semiannual compounding) on a notional principal of 100 million. The swap has a remaining life of 15 months. The LIBOR rates with continuous compounding for 3-month and 9-month and 15-month maturities are 5%, 5.5% and 5.7% respectively. The 6-month LIBOR rate at the last payment was 4.3% (with semiannual compounding). What is the value of the swap to the financial institution? Please show all workings. 1 (b) (i) Companies AAA and BBB have been offered the following rates per (40 marks) annum on a $100 million, 5-year loan: Fixed rate Floating Rate Company AAA 5.25% LIBOR Company BBB 5.85% LIBOR + 30bp Company AAA requires a floating rate loan, while company BBB requires a fixed rate loan. Design a swap that provide a bank, acting as intermediary, 5 basis points per annum and which divides the remaining gains in the swap equally between AAA and BBB. Please draw the associated flow diagram. (ii) When a swap contract is entered into, it is typically considered to be "at the money," what does this mean? 1 (c) The following information is for US Government Treasury yields and swap (20 marks) rates for five different maturities. 1 Year 3 Year 5 Year 7 Year 10 Year US Treasury yield (%) 0.121 0.311 0.387 0.540 0.645 US Swap rate (%) 0.679 0.452 0.473 0.534 0.610 Calculate the swap spread for each maturity. What changes in market and economic conditions may have occurred or be expected to occur to cause the swap spread to change across the maturity spectrum? 1 (a) Suppose that a financial institution has agreed to pay 6-month LIBOR and (40 marks) receive 4% per annum (with semiannual compounding) on a notional principal of 100 million. The swap has a remaining life of 15 months. The LIBOR rates with continuous compounding for 3-month and 9-month and 15-month maturities are 5%, 5.5% and 5.7% respectively. The 6-month LIBOR rate at the last payment was 4.3% (with semiannual compounding). What is the value of the swap to the financial institution? Please show all workings. 1 (b) (i) Companies AAA and BBB have been offered the following rates per (40 marks) annum on a $100 million, 5-year loan: Fixed rate Floating Rate Company AAA 5.25% LIBOR Company BBB 5.85% LIBOR + 30bp Company AAA requires a floating rate loan, while company BBB requires a fixed rate loan. Design a swap that provide a bank, acting as intermediary, 5 basis points per annum and which divides the remaining gains in the swap equally between AAA and BBB. Please draw the associated flow diagram. (ii) When a swap contract is entered into, it is typically considered to be "at the money," what does this mean? 1 (c) The following information is for US Government Treasury yields and swap (20 marks) rates for five different maturities. 1 Year 3 Year 5 Year 7 Year 10 Year US Treasury yield (%) 0.121 0.311 0.387 0.540 0.645 US Swap rate (%) 0.679 0.452 0.473 0.534 0.610 Calculate the swap spread for each maturity. What changes in market and economic conditions may have occurred or be expected to occur to cause the swap spread to change across the maturity spectrum