CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps
Immediately after a payment date, a pay-floating, receive-fixed swap is valued using the floating-rate-bond approach. The value of the floating-rate bond leg is most likely equal to:
The floating leg is worth the notional amount. Right after a payment or reset date, the floating-rate bond's coupon resets to the market rate, so it is priced at par, which equals the swap's notional.
- Athe present value of the notional only
- Bthe notional amountCorrect
- Cthe present value of the fixed bond leg
Explanation
Immediately after a reset or payment date, a floating-rate bond priced at the discount rate of its coupon is worth par, which equals the notional. Option A would apply only to a payment-free leg and ignores that the coupon compensates for time value. Option C is true only at initiation of a fair swap, not generally.
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