CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

Consider a one-year swap with quarterly payments on days 90, 180, 270, and 360. The underlying is 90-day LIBOR. The annualized LIBOR spot rates today are: L0(90) = 0.0345, L0(180) = 0.0358, L0(270) = 0.0370, L0(360) = 0.0375.

What should be the fixed rate of this swap?
A. 3.62%
B. 3.68%
C. 3.54%
Explanation: The present value factors are obtained as follows:

PV0(90) = 1 / (1 + 0.0345 x 90/360) = 0.9914
PV0(180) = 1 / (1 + 0.0358 x 180/360) = 0.9824
PV0(270) = 1 / (1 + 0.0370 x 270/360) = 0.9730
PV0(360) = 1 / (1 + 0.0375 x 360/360) = 0.9639
R = (360/90) x (1 - 0.9639) / (0.9914 + 0.9824 + 0.9730 + 0.9639) = 0.0368, or 3.68%

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