What must be the annualized two-year spot libor rate

Reference no: EM132199569

Question - Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one year; the second in two years. You have the following information on LIBOR rates: One-year spot rate is 3% per year. Forward rate in the second year is 5% per year.

What must be the annualized two-year spot LIBOR rate?

Find the floating-rate payments to be made.

Find the present value of the floating-rate payments.

Find the fixed rate that would price the swap correctly.

Now suppose that at T=1, just after the first payments were made, interest rate over year two turns out to be 6% per year (instead of 5% originally estimated). Which party is at a loss now: the one making the fixed payments, or the one making the floating payments? Which party faces credit risk?

Reference no: EM132199569

Questions Cloud

Strategy for managing it : Do you think the strategy for managing IT is different from the managing non-IT functions within an organization?

Do you think roger played company politics well : Do you think Roger played company politics well? If so, why didn’t he get the international sales job?

Someone atypical is a strong leader : Why do you think there are times that we are amazed when someone atypical is a strong leader? Is it stereotypes or something more?

The probable target customers of shopping malls : Describe who you see as Bass Pro Shop's target customers and who you see as the probable target customers of shopping malls.

What must be the annualized two-year spot libor rate : Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. Find the floating-rate payments to be made

Evaluate the regions natural and cultural assets : Describe and evaluate the region's natural and cultural assets. Which of these assets would you emphasize and why?

Search for a solution to the problem : You may also be reconsidering which contextual factors and forces are most relevant to the search for a solution to the problem.

Power tends to corrupt-absolute power corrupts absolutely : In 1887 Lord Acton wrote, “Power tends to corrupt and absolute power corrupts absolutely”. What do you believe he meant by this statement?

Importance of time in every aspect of its business activity : It places emphasis on promptness of service and delivery as one of its top priorities. Abel has adopted.

User Account

All Pages