You wish to enter into a 3-year USD vanilla interest rate swap with annual fixed and floating payments. Floating payments will be based on 12-month USD LIBOR, the value of which for the first period has been fixed at 6.00%. The 1x2 year forward LIBOR is currently 7.00% and the 2x3 year forward LIBOR is 8.00%. The current interest period and the forward periods each contain 365 days. Under LIBOR discounting, and ignoring any adjustment for convexity, what fixed annual swap rate (on a bond-market basis) will you pay?
The quetion is related to pricing swap contract.
DF1=1/1.06=0.943396226;
DF2=1/1.07^2=0.873438728
DF3=1/1.08^3=0.793832241
fixed swap rate=(1-DF3)/(DF1+DF2+DF3)=7.90%