Question
A swap dealer bank makes the following quotes for a swap based on the current 2 year Treasury Note (TN): Years of fixed rate payment
A swap dealer bank makes the following quotes for a swap based on the current 2 year Treasury Note (TN):
Years of fixed rate payment Bank pays fixed rate Bank receives fixed rate
2 TN+17 basis points TN+20 basis points
The variable rate is six-month LIBOR. The fixed rate is the coupon on the TN plus basis points; the TN today is 1.4%.
A)Suppose you have an asset with a rate LIBOR + .20%. Show how you could effectively convert this into a 2-year, fixed-rate asset by accepting the dealers swap.What is the fixed rate you would earn each six months on your asset (covered by swap)?
B)Suppose you have a loan liability and have to pay LIBOR+.5% each month. What is the effective fixed payment you could arrange by means of this swap with the dealer?
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Financial Econometrics
Authors: Peijie Wang
1st Edition
0415426693, 978-0415426695
