CFA Practice Question

There are 227 practice questions for this study session.

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: L0(180) = 7.2%, and L0(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:
PV0(180) = 1 / (1 + 0.072 x 180/360) = 0.9653
PV0(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%.

User Contributed Comments 2

User Comment
Ree2 Why (1/0.5)?
HenryQ It is to annualize.
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