The 6-month LIBOR rate is 3%, 1-year LIBOR rate is 3.6%, 1.5-year LIBOR rate is...
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The 6-month LIBOR rate is 3%, 1-year LIBOR rate is 3.6%, 1.5-year LIBOR rate
is 4%, 2-year LIBOR rate is 4.8%, and 2.5-year LIBOR rate is 5.7%. These are semi-annual rates.
Suppose Credit Suisse is considering entering into a 2.5-year interest swap with Bank of America,
in which Credit Suisse will receive LIBOR and pay a fixed rate over these 2.5 years. The payment
is made semi-annually. Calculate the swap rate using a pair of bonds approach. Suppose the 1-year
LIBOR drops to 3.1% immediately after Credit Suisse entered into the swap contract (the
remaining four LIBOR rates do not change). What is the value of this swap contract from the
standpoint of Credit Suisse? (The notional amount M=100)
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