3. A financial institution entered into an interest rate swap with company X. Under the term of the swap, it receives 6% fixed rate and pays SOFR-compound on a principal of $10 million. The payments are made annually. The remaining life of the contract is 6 years. Consider the market scenario in the following table: the present time is 0 and the 1-year SOFR-compound in year $t$ stands for the interest derived from compounding of all SOFR in the period $t - 1$ to $t$. Time (years) 1-year SOFR-compound (%) 0 6 1 5 2 5.8 3 5.3 4 5.5 5 5.6 6 6.1 Write down the cash flow stream of the financial institution resulting from the swap in the following three years.
Added by Iker A.
Close
Step 1
- Fixed received each year = 6% × $10,000,000 = $600,000. - Floating paid in year t = (1-year SOFR-compound in year t) × $10,000,000. From the table for years 1–3 the SOFR rates are 5.0%, 5.8%, 5.3%. Show more…
Show all steps
Your feedback will help us improve your experience
James Kiss and 92 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
Problem 7.10.A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 4% per annum and pays six-month LIBOR on a principal of $10 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 2% per annum. What is the loss to the financial institution? Assume that six-month LIBOR was 3% per annum halfway through year 3 and that at the time of default all OIS rates are 1.8% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding.
Akash M.
6. Two parties enter into a 2-year fixed-for-floating interest rate swap with semiannual payment. The floating rate payments are based on LIBOR as follows. Find swap fixed rate. Maturity (days) Annualized rate Discount factor, Z 180 0.05 0.9756 360 0.06 0.9434 540 0.065 0.9112 720 0.07 0.8772 After 180 days, the LIBOR rates and discount factors are as follows: Maturity (days) Annualized rate Z 180 0.045 0.9780 360 0.050 0.9524 540 0.060 0.9174 What is the market value of the swap to the fixed rate payer if the notional principal is $1 million?
7.31. A financial institution has entered into a swap where it agreed to receive quarterly payments at a rate of 2% per annum and pay the SOFR three-month reference rate on a notional principal of $100 million. The swap now has a remaining life of 10 months. Assume the risk-free rates with continuous compounding (calculated from SOFR) for 1 month, 4 months, 7 months, and 10 months are 1.4%, 1.6%, 1.7%, and 1.8%, respectively. Assume also that the continuously compounded risk-free rate observed for the last two months is 1.1%. Estimate the value of the swap.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD