Question
Tim borrowed $1000 for two years from MZH Bank at a variable interest rate. Tim will make an interest payment to the bank at the
Tim borrowed $1000 for two years from MZH Bank at a variable interest rate. Tim will make an interest payment to the bank at the end of each year based on the 1-year spot interest rate at the start of that year and also repays $1000 at the end of 2 years. The current one-year spot rate is 3% and the 2-year spot rate is 4%.
Tim decided to enter into a two-year interest rate swap with annual settlement periods under which he will swap the variable interest rate for a fixed interest rate.
One year has passed and the 1-year spot interest rate today is the implied 1-year forward rate from time 1 to time 2. Determine the market value of the swap.
Possible Answers
A. $9.89
B. $10.00
C. $9.90
D. $10.30
E. $9.81
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