Suppose that a company entered into an interest rate swap some time ago. The company pays 6-month LIBOR and receives 3% per annum with semiannual compounding on a notional principal of $100 million. All payments of the swap are made semiannually. The swap has a remaining life of 7/6 years. The LIBOR rates per annum with continuous compounding for 2-month, 8-month, 14-month maturities are 2.5%, 3.2% and 4.0% respectively. The 6-month LIBOR rate at the last payment date was 2.8% per annum with semiannual compounding.

(a) An interest rate swap can be valued as the difference between the value of a fixed-rate bond and the value of a floating-rate bond. Use this approach to calculate the value of this interest rate swap for the company now.

(b) An interest rate swap can be valued as a portfolio of forward rate agreements. Use this approach to calculate the value of this interest rate swap for the company now.