Interest rate swap

CFA Level III Derivatives
#1

“Risk Management Applications of Swap Strategies,” Don M. Chance Section 2.1

“The fixed interest rate on the swap would not equal the Libor rate for the maturity of the swap but rather the rate that would make the present value of the fixed and floating payments equal.”

I thought a 2-year fixed is based on the the concept of compounding the interest rate with period 0 to 1 and period 1 to 2?? anyone can explain the difference of 2 years fixed and the rate that makes floating =fixed?

Thank you!

#2

If the 1-year LIBOR rate is 4% and the 2-year LIBOR rate is 6%, the fixed rate won’t be 6%. It will be less than 6% to account for the fact that the first floating-rate payment will be only 4%, not 6%.