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What is the value of the fixed-rate bond embedded

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Reference no: EM133076036

Suppose that the yield curve is flat at 5% per annum with continuous compounding. A five-year swap with a notional principal of $100 million in which 6% per annum with semi-annual compounding is received and six-month LIBOR is paid will last another 15 months. Payments are exchanged every six months. The six-month LIBOR rate at the last reset date (three months ago) was 7% per annum with semi-annual compounding. Answer in millions of dollars to two decimal places.

  • What is the value of the fixed-rate bond embedded in the swap?
  • What is the value of the floating-rate bond embedded in the swap?
  • What is the value of the swap for the floating rate payers?
  • The first ever coupon of the swap paid to the floating rate receiver was $5.5 million. What was the continuously compounded floating interest rate with a 6-month maturity when the swap was initiated? Hint: how is the floating rate coupon determined?

Reference no: EM133076036

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