Question

Using the following data, calculate the fixed-rate payer’s first two net quarterly payments/receipts for a hypothetical interest rate swap described below.

Notional principal $10 million.

Fixed rate 7.0%.

Days in the first quarter, 91.

Days in the second quarter, 92.

Current LIBOR (LIBOR0) 5.0%

Expected LIBOR (LIBOR1) 5.3%

Expected LIBOR (LIBOR2) 4.8%

Answer 1

Quarter 1:

Give that IRS Pays Fixed & receives Float

Assumption:

• Fixed leg Day count fraction = 30/360 (usually used in US)
• Float leg Day count fraction = ACT/360 (usually used for LIBOR)

?Calculation:

• Fixed leg calculation (Payer) = 10,000,000 * 7% * 90/360 = $ 175,000
• Float leg calculation.(Receiver) = 10,000,000 * 5% * 91/360 = $ 126,388.9 (here we used LIBOR0 because when calculating payments we take the last reset value of LIBOR)

Net = Receive - Pay = $ 126,388.9 - $ 175,000 = - $ 48,611.1 Paid by the Fixed rate Payer to the counterparty.

Quarter 2:

Calculation:

• Fixed leg calculation (Payer) = 10,000,000 * 7% * 90/360 = $ 175,000
• Float leg calculation.(Receiver) = 10,000,000 * 5.3% * 92/360 = $ 135,444.4 (here we used LIBOR1 because when calculating payments we take the last reset value of LIBOR)

Net = Receive - Pay = $ 135,444.4 -  $ 175,000 = -$ 39,555.6 Paid by the Fixed rate Payer to the counterparty