I have a very basic finance question I really appreciate any help I can get..!!!

Reply Tue 5 Mar, 2013 08:14 am
I am practicing for an upcoming financial class and this is harddddd!!!!

Suppose the current term structure of interest rates, assuming annual compounding, is as follows:

s1 s2 s3 s4 s5 s6
7.0% 7.3% 7.7% 8.1% 8.4% 8.8%

Recall that interest rates are always quoted on an annual basis unless stated otherwise.

Suppose a 6-year swap with a notional principal of $10 million is being configured. What is the fixed rate of interest that will make the value of the swap equal to zero? Round your answer to 3 decimal points (in decimal form, not in percentage).
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Reply Thu 27 Aug, 2015 01:24 am
You have to know the Formula to make the value of Swap as Zero

i.e. X= 1-d(0,T)
∑Tt=1 d(0,T)
Where T=6
When you calculate the numerator you get 1-(1/(1.088)^6)= (1-0.6031)= 0.3968
When you calculate the denominator you get { (1/(1.07)^1 +…………….(1/(1.088)^6)}= 4.6069

Finally solving the equation = 0.3968/4.6060 you get 0.0862 or 8.62%
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