Value of swap at the end of the first year to the borrower

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Reference no: EM132056027

At time 0, the term structure for (annual effective) interest rates is as follows for corresponding maturities:

1 year: 5%, 2 year: 10%, 3 year: 15%, 4 year: 20%

A borrower has a three-year, interest-only loan of amount 1,000,000 with floating interest payments to be paid at the end of each year. The borrower arranges a swap allowing the borrower to pay fixed interest at the appropriate swap rate. One year later, the term structure has an effective annual interest rate of 9% and annual effective rate 9.5% for two-year maturities. Determine the value of the swap at the end of the first year to the borrower.

Reference no: EM132056027

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