Suppose That You Are a Swap Bank and You Notice

question 56

Multiple Choice

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR. $\begin{array}{lccc}\text { Zero Rates } & 1 \text {-year } & \text { 2-year } & 3 \text {-year } \\\text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \\\text { Euro } & € 2 \% & € 3 \% & € 4 \%\end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

• A)5 percent
• B)4 percent
• C)3 percent
• D)2 percent

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Definitions:

Monthly Rate

Refers to the interest or finance charge applied to a loan or credit balance on a monthly basis.

Compounded Monthly

The process of calculating interest on an initial principal, which also includes the accumulated interest from previous periods, with the compounding occurring on a monthly basis.

Mortgage

A loan used to purchase a property, where the property itself serves as collateral for the loan.

Growing Annuity

A series of cash flows that grow at a constant rate for a specified number of periods, commonly used in retirement planning.