- 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**

Consider a one-year interest rate swap with semi-annual payments. The term structure of LIBOR spot rates is given as follows: L

_{0}(180) = 7.2%, and L_{0}(360) = 8.0%. What is the annualized fixed rate on the swap?A. 7.56%

B. 7.84%

C. 7.42%

**Explanation:**First calculate the present value factors for 180 and 360 days:

PV

_{0}(180) = 1 / (1 + 0.072 x 180/360) = 0.9653

PV

_{0}(360) = 1 / (1 + 0.08 x 360/360) = 0.9259

The fixed rate is (1/0.5) x (1 - 0.9259) / (0.9653 + 0.9259) = 0.0784, or 7.84%.

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**User Contributed Comments**
2

User |
Comment |
---|---|

Ree2 |
Why (1/0.5)? |

HenryQ |
It is to annualize. |