Question
Firm XYZ enters into an interest rate swap with a dealer in which XYZ pays a floating rate of LIBOR on a notional amount of
Firm XYZ enters into an interest rate swap with a dealer in which XYZ pays a floating rate of LIBOR on a notional amount of $50,000,000 with semiannual payments based on 30-day months and a 360-day year. Suppose that the LIBOR rate is 4.5 percent at the inception of the swap. In turn, it will receive a semiannual payment based on the same $50,000,000 notional amount from the dealer but calculated using a fixed rate of 5.0 percent and 30-day months and a 365-day year. (Note: 365-day for fixed-rate vs. the 360-day for LIBOR!) The net payment from the dealer to firm XYZ at the first settlement six months into the swap would be:
Correct Answer: $107,877
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