Consider a 3-year interest rate swap with a notional principal of AUD100,000, whereby A receives annual payments based on a floating interest rate and B receives annual payments based on a fixed rate of 5%pa. The floating interest rates on each payment date assume the values 6%, 5% and 4%. Calculate the cash flows in year three.
A) B pays A USD1,000
B) A pays B USD1,000
C) B pays A AUD1,000
D) A pays B AUD1,000

Question

Quizplus · Accepted Answer

In year three, the floating interest rate is 4%, and the fixed rate is 5%. Since A receives the floating rate and pays the fixed rate, A will pay B the difference, which is 1% of AUD100,000, equating to AUD1,000.

Consider a 3-Year Interest Rate Swap with a Notional Principal