FRM Part I · FRM Exam Part I · Swaps
A bank enters a 2-year annual-pay interest rate swap with a notional of USD 50 million, paying a fixed rate of 4.00% and receiving the floating rate. The floating rate for the first period was set at 3.50% at inception. What is the net cash flow to the bank at the first payment date?
The bank pays a net USD 250,000. It pays fixed interest of USD 2.00 million (4.00% of 50 million) and receives floating interest of USD 1.75 million (3.50%), so the net outflow is the 0.50% rate difference applied to... correctly 0.50% of 50 million equals USD 250,000.
- APays USD 250,000Correct
- BReceives USD 250,000
- CPays USD 500,000
- DReceives USD 500,000
Explanation
Fixed payment = 4.00% x 50 million = 2.00 million. Floating receipt = 3.50% x 50 million = 1.75 million. Net = 1.75 - 2.00 = -0.25 million, so the bank pays USD 250,000. Receiving 250,000 reverses the sign; 500,000 uses the full rate difference wrongly.
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
- A company has a two-year currency swap with annual payments. It receives EUR 3% on EUR 10 million and pays USD 4% on USD 11 million. The spo…
- 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 has issued a floating-rate loan paying SOFR + 1.00% and wants fixed-rate funding. It enters a swap paying 4.50% fixed and receivin…
- A bank has entered into a single interest rate swap with a corporate counterparty. Which statement best describes the bank's credit exposure…
- A bank has a swap with a corporate client in which the bank pays fixed and receives floating. Market rates then rise sharply across the curv…
- A company enters a three-year fixed-for-fixed currency swap with annual payments. It pays 3% on EUR 20 million and receives 5% on USD 22 mil…