LM 7: Pricing & Valuation of Interest Rates & Other Swaps

Question 1

What are interest rate swaps?

Answer 1

when company’s exchange one fixed interest rates on loan with a variable interest rate on loan.

Question 2

What is the net cash flow formula for the party that pays a fixed rate interest rate?

Answer 2

periodic settle value = (MRR - sT) * notional amount * period

mrr= market reference rate
sT = fixed rate swap rate
period = based on frequency of year

Question 3

Whats the equation for the par rate for a fixed rate interest swap given spot rate?

Answer 3

1 = st / ( 1+ spot rate 1 ) + st / ((1+spot rate 2) ^2) + st + 1 / ((1 + spot rate 3) ^ T)

Question 4

Whats the equation for the par rate for a fixed rate interest swap given discount factor?

Answer 4

1 = DF1 (sT) + DF2 (sT) + DFT(sT + 1)