Question: Consider a 16-month pay fixed receive floating interest rate swap with a notional principal of Sh. 1million. The cash flows are exchanged every 4 months.

Consider a 16-month pay fixed receive floating interest rate swap with a notional principal of Sh. 1million. The cash flows are exchanged every 4 months. The spot rates at initiation were as follows:

Term Rate

120-day 6%

240-day 8%

360-day 9%

480-day 10%

Required

a) Calculate the swap price at initiation (10 marks)

b) After 200 days, the spot rates are as follows

Term Rate

40-day 9%

160-day 10%

280-day 11%

The 120-day spot rate on the last settlement date was 8%.

Required

Calculate the value of the swap on day 200 (15 marks)

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