Value of fixed rate bond and floating rate bond

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Reference no: EM13975207

You have entered into an interest rate swap with a principal of $100 million involves the exchange of 5% per annum (semiannually compounded) for 6-month LIBOR. The remaining life is 14 months. Interest is exchanged every six months. The 2 month, 8 month and 14 month rates are 4.5%, 5%, and 5.4% with continuous compounding. Six-month LIBOR (after conversion into 30/360 day basis) was 5.5% four months ago. What is the close out value of the swap should you be paying fixed?

(Hint: Swap can be valued as the difference between the value of a fixed rate bond and the value of a floating rate bond. Value of the floating rate bond is valued at par immediately after the next payment date.)

Reference no: EM13975207

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