# J hawkins econ 136 financial economics 15 24 a swap as

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Unformatted text preview: = (1 + r2 )(1 + r2 ) Fixed Income III: R. J. Hawkins Econ 136: Financial Economics 15/ 24 A Swap as a Back-to-Back Bond 0.15 0.15 Fixed Coupon Floating Coupon 0.05 Fixed Coupon Floating Coupon 0.10 0.05 CASH FLOW CASH FLOW 0.10 0.00 -0.05 -0.10 0.00 -0.05 -0.10 -0.15 -0.15 0 1 2 3 4 N-1 N CASH FLOW NUMBER 0 1 2 3 4 N-1 CASH FLOW NUMBER Forwards &amp; Futures, and Notional Amount. A swap can be viewed as a collection of forwards or futures. The notional amount, or notional: the scale factor used to determine the amount to be paid. Netting of payments and lack of principal at risk reduced credit risk. Swaps: R. J. Hawkins Econ 136: Financial Economics 12/ 19 N Swap Valuation and Par Bonds The Par Coupon To the spot and par rates we add the notion of the par coupon. We know that the price PCB of a C -percent coupon bond is NT PCB = C i =1 DFi + 1 × DFNT , where T is the number of years to maturity. For a par bond NT 1 = Cpar i =1 DFi + 1 × DFNT , NT 1 − DFNT = Cpar DFi , or Cpar = i =1 1 − DFNT NT...
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