An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 5% 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 4%, 5%, and 6%. All rates are annually compounded. Suppose the principal 100. The value of the floating rate bond underlying the swap is 100. What is the value of the swap when LIBOR discounting is used?

Answer rating: 100% (QA)

To calculate the value of the interest rate swap we need to find the present value of the cash flows ... View the full answer