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An interest rate swap made by Rio Tinto has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and
An interest rate swap made by Rio Tinto has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. All rates are annually compounded. The one-year, two-year and three-year LIBOR/swap zero rates are as follows: Interest rate swap LIBOR/Swap Zero rates One-Year 2% Two-Year 3% Three-Year 4% What is the value of the swap as a percentage of the principal when LIBOR discounting is used? (Supposing a principal value of $100 makes it easier to calculate the percentage.)
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