Consider a swap with the notional amount of $40 million, semiannual payments bot
ID: 2723656 • Letter: C
Question
Consider a swap with the notional amount of $40 million, semiannual payments both for the fixed- and floating-rate payers, day counting with actual/360 basis. Assume that the actual number of days was 92 and 91 for the current and next quarter. The six-month LIBOR was 1.4% on the last day of the previous quarter. The fixed swap rate is 1.8%. How much is the payment that is exchanged for the first period?
Greater than $200,000 but less than 400,000
Greater than $100,000 but less than 200,000
Less than $100,000
Greater than $600,000
Greater than $400,000 but less than 600,000
Explanation / Answer
Answer : Less than $100,000
Payment by the party paying fixed rate = For current quarter = 0.018 x 92/360 x 4,000,000 = $184,000
Payment for next quarter = 0.018 x 91/360 x 4,000,000 = $182,000
Total payment = 184,000 + 182,000 = 366,000
Floating rate payment = 0.014 x 92/360 x 4,000,000 = $143,111
Next quarter = 0.014 x 91/360 x 4,000,000 = 141,556
Total payment = 143,111 + 141,556 = $284,667
The difference of payment = $366,000-284,667 = $81,333; Hence, it is less than $100,000