CMA Final · Strategic Financial Management · Swaps
A 2-year annual-pay interest rate swap has notional Rs 10 crore. Zero-coupon discount factors are 0.95 for year 1 and 0.90 for year 2. What is the fair fixed swap rate (to two decimals) that makes the swap value zero at inception?
The fair fixed rate is about 5.41%. It equals one minus the final discount factor divided by the sum of discount factors: 0.10 divided by 1.85, which makes the present values of fixed and floating legs equal.
- A5.41%Correct
- B5.00%
- C5.26%
- D10.00%
Explanation
Fixed rate = (1 - DF2) / (DF1 + DF2) = (1 - 0.90)/(0.95 + 0.90) = 0.10/1.85 = 5.405%, about 5.41%. 5.26% is 0.05/0.95, using only the first discount factor. 10.00% omits the annuity denominator.
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