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1 The 10-year swap rate is 4% and the 3-year swap rate is 3.5%. What is the 7-year forward swap rate starting in three years?

1 The 10-year swap rate is 4% and the 3-year swap rate is 3.5%. What is the 7-year forward swap rate starting in three years?


2 The current 2-year swap rate is 3% and the current 5-year swap rate is 4%. What is the 3-year rate starting in two years? You own a 5-year floating rate note paying Libor +25 bps. You believe that 3-year swap rates starting in two years will be 5%. How can you use the forward swap market to profit from your forecast of rates?


3 You are borrowing for 5-years at Libor +1%. You bought a 5-year 4% Libor cap for 2% upfront. Assume 5-year swap rates are 3%. What is your net exposure at:

  1. Libor less than 4%
  2. Libor at 4%
  3. Libor over 4%


4 You have a $20m 3 year loan outstanding at Libor +50 bps. You buy a 4% Libor cap for 1%. What is the annualized cost of the cap? Assume your bank agrees to let you pay the annualized cost instead of the upfront cost, what is your net cost of money for the quarter if Libor reaches 5%. What are the components of the cost? Assume 3 year swap rates are 3%.


5 You are receiving fixed on a 3-year swap at 1% versus Libor. You pay 50 bps upfront for a one year option to pay fixed at 1% for 2 years.

  1. Under what conditions will you exercise the option?
  2. If you do not exercise the option, what is your annualized return over the three years?
  3. At what 2-year rate, one year from now, will you break even on this option?

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