Analti_Calte

swap rate=(1-Zn)/(Z1+Z2....+Zn), {Zi=discount factor}
swap rate=[SUM(FDF*forwad rate)]/SUM(FDF), {FDFi=Zi(mentioned)}

==>

(swap_rate)*(Z1+Z2+....Zn)+Zn = 1
(swap_rate)*(Z1+Z2+....Zn) = Z1*forwad_rate_1+...+Zn*forwad_rate_n

==>

PV(received fixed rate counpon bond)= PV(received floating rate bond)
PV(received fixed rate coupons) = PV(received floating rate counpons)

The only difference is whether is the principal is paid or not.

Notes: forward_rate_i could be derived from the discount factor Zi's, vice versa.



Edited 2 time(s). Last edit at Monday, March 28, 2011 at 09:37AM by deriv108.