FRM Part I · FRM Exam Part I · Swaps
A 3-year annual-pay interest rate swap has discount factors of 0.97 (1 year), 0.94 (2 years) and 0.91 (3 years). What is the par swap rate (annual compounding)?
The par swap rate is one minus the final discount factor divided by the sum of the discount factors: 0.09 divided by 2.82, or about 3.19%. This makes the fixed leg's present value equal the floating leg's value at par. Ignoring the annuity weighting gives wrong results.
- A3.19%Correct
- B3.00%
- C3.30%
- D4.71%
Explanation
Par swap rate = (1 - DF3) / sum of DFs = (1 - 0.91) / (0.97 + 0.94 + 0.91) = 0.09 / 2.82 = 3.19%. Dividing 0.09 by 3 gives 3.00%, which ignores discounting of the fixed payments. Using (1/0.91 - 1)/3 gives 3.30%. Omitting the final DF from the annuity gives 4.71%.
Did you get it right without looking?
One question tells you little. A timed set on Swaps shows your real accuracy, how long you take and where you lose marks.
More Swaps questions
- Immediately after a reset date, a swap's floating leg is valued at par. Which of the following best explains why the floating-rate leg of a …
- Which of the following best describes an amortizing swap and a related variant, the step-up swap?
- A currency swap has been in place for some time. Which feature of a currency swap, compared with an otherwise similar interest rate swap in …
- A US corporation has issued a EUR-denominated fixed-rate bond and wants to hedge both the EUR coupons and the EUR principal repayment agains…
- A company enters a 3-year annual-pay fixed-for-fixed currency swap in which it pays 4% on a USD principal of 50 million and receives 3% on a…
- A company enters into a three-year amortizing interest rate swap in which it pays a fixed rate of 4% per year and receives floating. The not…