### CFA Practice Question

Counterparties A and B have entered into a 3-year plain vanilla interest rate swap today. The swap has a notional principal of \$100 million and resets every 3 months. A pays fixed rate of 8% while B pays the floating rate of 3-month LIBOR + 60 basis points. The current 3-month LIBOR rate equals 7.4%. If the 3-month LIBOR rate on the first and second swap reset dates equal 7.5% and 7.8%, which of the following is (are) true?

I. No money exchanges hand today.
II. In 3 months, A pays B an amount of \$50,000.
III. In 6 months, B pays A an amount of \$33,333.
A. I and II.
B. I and III.
C. I only.
Explanation: No money changes hand today.

On the first reset date, A's liability is 8% and that of B is 7.4% + 60 basis points = 8%, both on an annualized basis. Thus, the two payments cancel out and no money exchanges hand on the first reset date.

On the second reset date, A's liability is 8% and that of B is 7.5% + 60 basis points = 8.1%, both on an annualized basis.

The net difference of 10 basis points annualized equals 2.5 basis points and means that B pays A an amount equal to \$2.5*0.0001*100 million = \$25,000.