Ali Company and Bill Company entered into a semi-annual pay plain vanilla interest rate swap with a
Question:
Ali Company and Bill Company entered into a semi-annual pay plain vanilla interest rate swap with a nominal value of $8,000,000. Bill offered to pay Ali a fixed annual rate of 2.75% (with semi-annual compounding). The remaining life of the swap is nine months. Assume the six-month LIBOR rate observed three months ago was 2.6% with semi-annual compounding. Today's three and nine month LIBOR rates are 2.526% and 2.846% (with continuous compounding). The implied forward rate is 3.0287% with semi-annual compounding. What is the value of the swap to Bill Company using the FRA methodology? Do not round intermediate calculations.
Ali Company and Bill Company entered into a semi-annual pay plain vanilla interest rate swap with a nominal value of $8,000,000. Bill offered to pay Ali a fixed annual rate of 2.75% (with semi-annual compounding). The remaining life of the swap is nine months. Assume the six-month LIBOR rate observed three months ago was 2.6% with semi-annual compounding. Today's three and nine month LIBOR rates are 2.526% and 2.846% (with continuous compounding). The implied forward rate is 3.0287% with semi-annual compounding. What is the present value of the net cash flow (or payoff) at nine months point to Bill Company?
Advanced Accounting
ISBN: 978-1934319307
2nd edition
Authors: Susan S. Hamlen, Ronald J. Huefner, James A. Largay III