- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 8. Interest Rate Swap Contracts

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**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.

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**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 |