Question
Compute the value today of the following interest rate swap. The principal amount of the swap is $10,000,000. Assume that the interest rate swap pays
Compute the value today of the following interest rate swap. The principal amount of the swap is $10,000,000. Assume that the interest rate swap pays a fixed annual rate of 6.30% and has a remaining life of 1.5 years. Both floating and fixed payments are exchanged once a year. The floating payments are indexed on the one-year LIBOR rate. The one-year LIBOR rate observed six months ago was 4.75% with annual compounding. Todays LIBOR rates for 6-month, 12-month and 18-month deposits are 5.5%, 6%, and 6.5% respectively. These rates are annual and semiannually compounded.
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