Question

Kala enters into a two-year interest rate swap with a level notional amount of 1,000. She...

Kala enters into a two-year interest rate swap with a level notional amount of 1,000. She exchanges variable interest payments for fixed interest payments every six months. The t-year spot rates at inception are:

t s1
.5 1.1%
1 1.25%
1.5 1.55%
2 2%

Calculate the semiannual swap rate that Kala will receive.

  1. 0.14%

  2. 0.99%

  3. 1.49%

  4. 1.98%

  5. 2.21%

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Answer #1

Answer is 0.99%.

Kala will receive semi-annual fixed swap rate in exchange of variable rate.

fixed swap rate = (1- PV factor of last spot rate)/Sum of PV factor of all spot rates

Years to Maturity Spot Rate PV Factor
0.5 1.10% 0.9945
1 1.25% 0.9877
1.5 1.55% 0.9772
2 2.00% 0.9612
Total 3.9206
Fixed rate Kala will receive 0.99%

Calculations

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