swaps

CFA Level II Derivatives
#1

I understand (can memorize) the formula to get the fixed rate of a given swap. But why then, when calculating the value to the fixed rate receiver fo the swap, do we do:

  • (fixed rate agreed upon @ initiation- new calculated fixed rate) * sum of present value factors) * (notional) = payoff to fixed rate receiver

I don’t get why the sum of present value factors comes into the equation above??

thanks as always!

#2

Because you’ll be getting a series of interest rate payments in the future; you multiply each by its present value factor to get the present value of each payment, then add them to get the total present value.

#3

It’s algebra. Consider this analogy.

ax+bx+cx+dx=x(a+b+c+d).