- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 7. Pricing and Valuation of Interest Rates and Other Swaps
- Subject 1. Pricing and Valuation of Swap Contracts
CFA Practice Question
Quantum Electronics enters into a two-year $20 million notional principal interest rate swap in which it promises to pay a fixed rate and receive payments at LIBOR. The payments are made every six months based on the assumption of 30 days per month and 360 days in a year. The term structure of LIBOR interest rates is given as follows:
What should the fixed rate be?
Correct Answer: 9.75%
The annualized fixed rate would be R = (360/180) [(1 - 0.8264) / (0.9569 + 0.9112 + 0.8673 + 0.8264)] = 0.0975.
Thus, the rate would be 9.75%. The swap fixed payments would be $20,000,000 x 0.0975 x 180/360 = $975,000.
User Contributed Comments 2
| User | Comment |
|---|---|
| HDave | Make sure to convert annual LIBOR% to 1.5 yrs and 2 yrs rate!! |
| aravinda | 0.0975 is the annualized rate...so to get the fixed payments you got to convert it back.... or just take the 'non-annualized rate" of 0.04875 and multiply it by 20 million |