An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year, and three-year LIBOR/swap zero rates are 2%, 3%, and 4% with continuous compounding. What is the value of the swap as a percentage of the principal when LIBOR discounting is used assuming that the principal is $100? (Note: You are expected to use continuous compounding/discounting. If you use discrete discounting the answer will be close) a. None of the other answers provided is correct. b. 2.88% c. 1.05% d. 0.00% e. 1.00%
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year, and three-year LIBOR/swap zero rates are 2%, 3%, and 4% with continuous compounding. What is the value of the swap as a percentage of the principal when LIBOR discounting is used assuming that the principal is $100? (Note: You are expected to use continuous compounding/discounting. If you use discrete discounting the answer will be close) a. None of the other answers provided is correct. b. 2.88% c. 1.05% d. 0.00% e. 1.00%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year, and three-year LIBOR/swap zero rates are 2%, 3%, and 4% with continuous compounding. What is the value of the swap as a percentage of the principal when LIBOR discounting is used assuming that the principal is $100? (Note: You are expected to use continuous compounding/discounting. If you use discrete discounting the answer will be close) a. None of the other answers provided is correct.
b. 2.88%
c. 1.05%
d. 0.00%
e. 1.00%
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