Consider the following plain vanilla interest rate swap: Comerica Bank borrowed $200mm for three years with annual
Question:
Consider the following plain vanilla interest rate swap: Comerica Bank borrowed $200mm for three years with annual payments at a floating rate of one-year Libor, but now wants fixed rate liabilities. Goldman Sachs thinks that interest rates will decrease in the future, so they are willing to make three years of floating rate payments at one-year Libor in exchange for fixed payments of 4% on $200mm notional.
What is the value of this interest rate swap? Who gains and who loses?
(Use the following table of zero-coupon bond prices and assume today is a reset date). Table 1: Zero Coupon Bond Price Schedule (Par values normalized to $1)
Time to maturity | ZCB Price |
1 | 0.97 |
2 | 0.94 |
3 | 0.92 |
Estimate the swap rate that will make the above-described swap a fair deal for both parties.
Advanced Accounting
ISBN: 978-1934319307
2nd edition
Authors: Susan S. Hamlen, Ronald J. Huefner, James A. Largay III