Question

Under the terms of an interest swap, a bank has agreed to pay 10% per annum and receive three-month LIBOR in return on a notional principal of $100 million with payments being exchanged every three months. The swap has a remaining life of 11 months. The average of the bid and offer fixed rates currently being swapped for three-month LIBOR is 12% per annum for all maturities. The three-month LIBOR rate one month ago was 11.8% per annum. All rates are compounded quarterly.

a. Compute the value of the swap to the receiver of fixed interest using the bond price method.

i. Value of variable-rate bond component:

ii. Value of fixed-rate bond component:

b. Compute the value of the swap to the receiver of fixed interest using the FRA method. Show the steps by filling out the following table:

Time from Today:	Forward rates continuously compounded (% annual rate)	Forward rates quarterly compounded (% annual rate)	Implied Payments due at the time (end of period)	Implied Payments discounted to present
2 months
5 months
8 months

Value of swap:

Answer 1

An offer is defined as the manifestation of the willingness for entering into the bargain in order to justify the understanding that the consent will end up with discussions and a form K.

An agreement which is enforced as relied upon offer and acceptance, it is stated that the terms and conditions must be competent of resolving in the procedure which clears that the consent of both the parties agreed upon the similar terms. The manifestation of consent may be in oral or written form. The rules states that the offer constitutes the order, and the offeror is the customer or the buyer. The manifestation is relied upon the understanding of one party in the belief of the other party’s position.

7 ways an offer can be terminated:

1. Revocation: An offer can be terminated when an offeror states communication of notice of revocation. Before the offeror is bound by the terms of the offer, he can revoke the offer. This implies that it should be brought to the knowledge of the offeree that the notice of revocation is given by the offeror.
2. Lapse of time: The offer automatically comes to an end, if the offeror does not accepts the offer within the fixed time period.
3. Failure to accept the conditions of the precedent: The offer comes to an end, when then offerror does not fulfill the conditions as stated by the offeree before the acceptance of the offer.
4. Insanity or death of the offeror: The offer automatically gets terminated with the insanity or death of the offeror, which should be brought to the knowledge of the offeree before the acceptance of the offer.
5. Counter offer by the offeree: The initial or the original offer comes to an end, when the offeree makes a counter-offer.
6. Rejection of offer by the offeree: The offer is terminated, if the offeror rejects the acceptance of the offer as per the stated terms and conditions.
7. Changes in the law: The offer comes to an end, if there occurs change in the laws, thus making the offer incapable or illegal.

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Socializing is defined in the term of ideation which states about talking to others and reaching what they actually want.

nder the terms of an interest swap, a bank has agreed to pay 10% per annum and receive three-month LIBOR in return on a notional principal of $100 million with payments being exchanged every three months. The swap has a remaining life of 11 months. The average of the bid and offer fixed rates currently being swapped for three-month LIBOR is 12% per annum for all maturities. The three-month LIBOR rate one month ago was 11.8% per annum. All rates are compounded quarterly.

a. Compute the value of the swap to the receiver of fixed interest using the bond price method.

i. Value of variable-rate bond component:

ii. Value of fixed-rate bond component:

b. Compute the value of the swap to the receiver of fixed interest using the FRA method. Show the steps by filling out the following table:

1 Compute the value of the swap:

The swap is stated as the long position taken in the floating rate bond which when combined with the short position in the fixed rate bond.

The discount rate is 12% with quarterly compounding as 11.82% with continuous compounding.

Step-1:

Floating payment = 11.8% x 100 x 25%

                                 = 0.118 x 100 x 0.25

                                = 2.95

Thus the floating payment is 2.95

Step-2:

The value of floating rate bond = 102.95e^-0.1182x2/12

                                                                                      = 100.941

The value of the floating rate bond is 100.941

Step-3:

The value of the fixed rate bond = 2.5e^{-0.1182 x 2/12} + 2.5e^{-0.1182 x 5/12} + 2.5e^{-0.1182 x 8/12} +

                                                             2.5e^{-0.1182 x 11/12} + 2.5e^{-0.1182 x 14/12}

                                                         = 98.678

Thus the value of the fixed rate bond is 98.678

Step-4:

The value of the swap = 100.841 – 98.678

                                        = $2.263 million

Thus the value of swap is $2.263 million