Explanation:
The value of the swap to the pay-fixed party is zero because:
Since both the original fixed rate and the current equilibrium fixed rate are identical (1.5%), the swap has zero value to both parties.
Mathematical reasoning:
This represents a situation where market interest rates haven't changed since swap initiation, making the swap neither an asset nor a liability to either party.
Ultimate access to all questions.
The equilibrium fixed rate for a 3-year fixed-for-floating interest rate swap with semiannual resets was 1.5% on the initiation date. At the first swap reset, the equilibrium fixed rate for the 2.5-year fixed-for-floating interest rate swap is 1.5% and the present value factors are as follows:
| Maturity (Years) | Present Value Factor |
|---|---|
| 0.5 | 0.995025 |
| 1.0 | 0.987167 |
| 1.5 | 0.977995 |
| 2.0 | 0.967118 |
| 2.5 | 0.954654 |
The value of the swap to the pay-fixed party is:
A
negative.
B
zero.
C
positive.
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