Suppose the current term structure of interest rates, assuming annual compoundin

Question

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

Swap Rates

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. (You should use the term structure of interest rates from Question 1.)

Please submit your answer as a percentage rounded to two decimal places. So for example, if your answer is 4.567% or equivalently 0.04567, then you should submit an answer of 4.57.

Explanation / Answer

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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