XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SF10,000,000 and receive LIBOR - ½ percent.As of the third reset date (i.e.mid-way through the 6 year agreement),calculate the price of the swap,assuming that the fixed-rate at which XYZ can borrow has increased to 10%.(Round your final answer to nearest SF and Do not round intermediate calculations)
A) SF248,685
B) SF900,000
C) SF2,700,000
D) SF7,300,000

Question

Quizplus · Accepted Answer

PV of a hypothetical bond issue of SF10,000,000 with three remaining 9 percent coupon payments at the new fixed rate of 10 percent is SF9,751,315, as shown underneath.SF10,000,000/1.331 = SF7,513,148.01.......(A)PV of the three coupon payments is:(SF900,000/1.1) + (SF900,000/1.21) + (SF900,000/1.331) = SF2,238,166.79......(B)PV of the Bond and its coupon is = (A) + (B)= SF7,513,148.01 + SF2,238,166.79= SF9,751,314.80Therefore, the price of the swap = SF10,000,000 - SF9,751,314.80= SF248,685

XYZ Corporation Enters into a 6-Year Interest Rate Swap with a Swap