plain vanilla interest rate swap negotiated, following, principal, interest, receive

TheMBAGlover

Assume that you are analyzing a plain vanilla interest rate swap with the following characteristics:
Counterparty X : Counterparty Y pay fixed rate 6% : pay floating rate LIBOR + 0.5% receive floating rate LIBOR + 0.5% : receive fixed rate 6% Swap tenor: 10 years Notional principal: $1,000,000 LIBOR0: 4.75%
If this were an "in-advance" swap, Counterparty X would make its first fixed rate payment at the time the swap is negotiated. The amount of the payment would be:

A. $60,000
B. $52,500
C. $57,279.24

Kiakaha

The question is worded oddly.

Y pays fixed - 60000
X pays floating - 52500

I think the answer is B.
They would normally be netted though, so the actual payment would be from Y - 7500.

rgonzalez

fixed rate payment = 1 Million * 6% = 60K? A

CP

Mechanic

I thought it said Y pays fixed?
"Counterparty Y pay fixed rate 6%"

I'm having trouble reading the question. Was it originally in chart form?

Bulla564

Yeah I am having understanding the question too.
If X is paying fixed - X pays 6% of 1mn ie 60K, whereas if it pays floating it pays 5.25% of 1mn - 52500. And jblamb is correct, the money exchange should be ideally only the difference in interest rates.

dotamasta

Counterparty X : Counterparty Y
pay fixed rate 6% : pay floating rate LIBOR + 0.5%
receive floating rate LIBOR + 0.5% : receive fixed rate 6%

Swap tenor: 10 years
Notional principal: $1,000,000
LIBOR0: 4.75%

I think this is the actual format of the question. With X's terms on one side and Y's terms on the other

ie. CP is right



Edited 1 time(s). Last edit at Sunday, October 25, 2009 at 01:39PM by jblamb.

disiz64

Is this question possible in real life given that we use beginning floating rate and ending fixed rate to compute the difference? We would not know the ending fixed rate!

rkapoor

I also have problem at understanding the question. Could you please cite the source of that question?