Question

For Zero-Coupon Bonds B(0,3), B(0,2) and B(0,1), prices are 0.90, 0.92, and 0.94, respectively. Consider a three-year swap receiving fixed paying floating with principal of $10 million dollars, receiving a fixed rate of 2 percent per year, and paying the one-year floating spot rate yearly. What is the value of the swap when it is issued? Select one: a. $448,000 b. 0 c. $448,000 d. $552,000 e.  $552,000

Answer 1

Value of Any swap is the present value of its future interest cost saving, lets do it by excel.

Formulas USed:-

Price	Yield rate	Spot rate	Fix rate	saving	Amount saved	PV of saving
0.9	=1/A2-1	=(1+B2)/(1+B3)-1	0.02	=C2-D2	=10000000*E2	=F2/(1+B2)
0.92	=1/A3-1	=(1+B3)/(1+B4)-1	0.02	=C3-D3	=10000000*E3	=F3/(1+B3)
0.94	=1/A4-1	=(1+B4)/(1+B5)-1	0.02	=C4-D4	=10000000*E4	=F4/(1+B4)
					Value of Swap	=SUM(G2:G4)

Step:-

1. determine the Yield Rate

2. Determine the spot rate

3. Find the interest saving

4. Amonut of saving

5. Present value of Interst saving, (consider Yield rate as the appropriate rate of discount)

I hope my efforts will be fruitful to you....

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