rate_swap - Interest Rate Swaps Introduction Consider the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Interest Rate Swaps Introduction Consider the following term structure of interest rates Years to Maturity 1 2 3 Yield Rate 4.5% 5% 6% The implied (forward) annual rates are (check it!) Year 1 Year 2 Year 3 4.500000% 5.502392% 8.028662% We want to find a fixed annual rate R % for all three years that will be equivalent to the implied annual rates above. We first turn the annual rates to money amounts by considering interest earned on $100 for each year (paid at the end of each year): Year 1 Year 2 Year 3 Interest by Implied Rate 4.500000 5.502392 8.028662 Interest by Fixed Rate R R R- 1 2 3 4.500... 5.502... 8.028... R R R The two cash-flows should have the same present values at t = 0 (by the term structure), so 4 . 500000 1 . 045 + 5 . 502392 1 . 05 2 + 8 . 028662 1 . 06 3 = R 1 . 045 + R 1 . 05 2 + R 1 . 06 3 (solving) = R = 5 . 932146. Therefore, the fixed rate is 5.932146%. This is the swap rate ....
View Full Document

This note was uploaded on 02/27/2012 for the course FINANCE 101 taught by Professor Yuy during the Spring '12 term at Centenary College New Jersey.

Page1 / 3

rate_swap - Interest Rate Swaps Introduction Consider the...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online