FRM Part I · FRM Exam Part I · Swaps
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 notional is 100 million in year 1, 80 million in year 2 and 60 million in year 3, with each year's fixed payment based on that year's notional. What is the total of the fixed payments over the three years?
The total fixed payments are 9.6 million. Each year's payment is 4% of that year's notional: 4.0 million, 3.2 million and 2.4 million. Using a constant 100 million notional would overstate the total at 12.0 million, because the notional declines.
- A9.6 millionCorrect
- B12.0 million
- C7.2 million
- D2.4 million
Explanation
Year 1 payment is 4% x 100 = 4.0 million, year 2 is 4% x 80 = 3.2 million, and year 3 is 4% x 60 = 2.4 million. The total is 4.0 + 3.2 + 2.4 = 9.6 million. Using a constant 100 million notional gives 12.0 million, which ignores the amortization.
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