J hawkins econ 136 financial economics 15 24 a swap as

Info iconThis preview shows page 1. Sign up to view the full content.

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

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 & 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...
View Full Document

Ask a homework question - tutors are online