From equation 12 to equation 13, Could anyone please explain why the FB (Fixed bond value) is equal to 1?
We set it to “1” at the start as it equals the value of the floating rate leg.
At inititation both parties are happy
Value fo fixed rate leg - value of floating.
As we are on coupon reset date price $1 par of floating bond = $1
We want to know then what coupon, gives current spot rates, would make a fixed rate bond sell at oar, $1.
The is what equation 13 gives us.
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If this is not Par bond, can we find Swap rate?
It is a theoretical bond that trades at par given current spot rates.
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