Pricing a Swap Suppose that the yield curve is flat at 5% per annum with...
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Finance
Pricing a Swap
Suppose that the yield curve is flat at 5% per annum with continuous compounding. A swap with a notional principal of $100 million in which 6% is received and six-month LIBOR is paid will last another 15 months. Payments are exchanged every six months. The six-month LIBOR rate at the last reset date (three months ago) was 7%. Answer in millions of dollars to two decimal places.
a). What is the value of the fixed-rate bond underlying the swap?
b). What is the value of the floating-rate bond underlying the swap?
c). What is the value of the payment that will be exchanged in 3 months?
d). What is the value of the payment that will be exchanged in 9 months?
e). What is the value of the payment that will be exchanged in 15 months?
f). Compute the value of the swap as the difference between two bond prices.
g). Compute the value of the swap as a portfolio of forward rate agreements.
h). Who gains?
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