Assume that you are analyzing a plain vanilla interest rate swap with the following characteristics: Counterparty X : Counterparty Y pay fixed rate 6% : pay floating rate LIBOR + 0.5% receive floating rate LIBOR + 0.5% : receive fixed rate 6% Swap tenor: 10 years Notional principal: $1,000,000 LIBOR0: 4.75% If this were an “in-advance” swap, Counterparty X would make its first fixed rate payment at the time the swap is negotiated. The amount of the payment would be: A. $60,000 B. $52,500 C. $57,279.24
The question is worded oddly. Y pays fixed - 60000 X pays floating - 52500 I think the answer is B. They would normally be netted though, so the actual payment would be from Y - 7500.
fixed rate payment = 1 Million * 6% = 60K? A
I thought it said Y pays fixed? “Counterparty Y pay fixed rate 6%” I’m having trouble reading the question. Was it originally in chart form?
Yeah I am having understanding the question too. If X is paying fixed - X pays 6% of 1mn ie 60K, whereas if it pays floating it pays 5.25% of 1mn - 52500. And jblamb is correct, the money exchange should be ideally only the difference in interest rates.
Counterparty X : Counterparty Y pay fixed rate 6% : pay floating rate LIBOR + 0.5% receive floating rate LIBOR + 0.5% : receive fixed rate 6% Swap tenor: 10 years Notional principal: $1,000,000 LIBOR0: 4.75% I think this is the actual format of the question. With X’s terms on one side and Y’s terms on the other ie. CP is right
Correct Answer: C. In this case, the first payment would be the present value of the “in arrears” amount, discounted at LIBOR. (1,000,000)(.06)/(1.0475)1 = 57,279.24 Because the first payment is normally paid (in this case) one year out. Since you are receiving the payment now instead of later, you will discount for time value of money which is LIBOR (not LIBOR + 0.005, because the 0.005 is the premium that Y must make, not included in the PV) Essentially we are discouting fixed payment using LIBOR as a discount rate I don’t like the wording and cannot really make sense out of this either;
D’Artagnan Wrote: ------------------------------------------------------- Assume that you are analyzing a plain vanilla interest rate swap with the following characteristics: Counterparty X : Counterparty Y pay fixed rate 6% pay floating rate LIBOR + 0.5% receive floating rate LIBOR + 0.5% receive fixed rate 6% Swap tenor: 10 years Notional principal: $1,000,000 LIBOR 0: 4.75% If this were an “in-advance” swap, Counterparty X would make its first fixed rate payment at the time the swap is negotiated. The amount of the payment would be: > A. $60,000 > B. $52,500 > C. $57,279.24 Is this the way the question is set up? If so I believe the first payment is $60,000. However, can someone clarify? I thought swaps were netted against each other so the payment due from the fixed payer would be 60,000-52,500=7,500
Is this question possible in real life given that we use beginning floating rate and ending fixed rate to compute the difference? We would not know the ending fixed rate!
I also have problem at understanding the question. Could you please cite the source of that question?
this is a special version of the plain vanilla interest rate swap - where instead of settling payments in arrears - you are trying to determine IN ADVANCE what the fixed would be required to pay floating. Since the Floating rate NOW is known - that amount is what would be paid. IN ADVANCE. at the time of the first payment (in a regular swap) - he would pay 60K. Floating would be required to pay 52.5K -> and there would be netting and fixed would pay floating 7.5K. however when paid in advance - Fixed knows floating rate is 4.75%, and so he needs to pay 60K/1.0475 NOW to settle.