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Please do all calculations and report your answers using four decimal points, e.g. if r = 0.08; and T = 0.5, then erT (0.08x0.5) =
Please do all calculations and report your answers using four decimal points, e.g. if r = 0.08; and T = 0.5, then erT (0.08x0.5) = 1.0408 1. A corporation enters into a $10 million notional principal interest rate swap. The swap calls for the corporation to pay a fixed rate 5.4% and receive a floating rate of LIBOR. The payment will be made every months for three years. The 6-month LIBOR rates are listed in the following table: Time (t) 6-month LIBOR rate 0 5.20% 0.5 5.25% 5.3% 0.5 5.35% 2 5.45% 2.5 5.5% 3 1 Suppose some time has passed and the above swap has a remaining life of 1.25 years. The LIBOR rates with continuous compounding for 3-month, 9-month, and 15-month maturities are 5.3%, 5.4%, 5.45%, respectively. The 6-month LIBOR rate at the last payment date was 5% with semi-annual compounding. (a) Please calculate the value of the swap in terms of bonds by finding (A), (B), and (B)-(A) in the following table: discount value of B fixed value of B float time factor (C.F. of Bfited) (C.F. of Bfloat) 0.25 0.9868 0.75 0.9603 1.25 0.9341 Total (A) where PV stands for present value, and C.F. stands for cash flow. PV of B fixed PV of B float (B)
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