Find the Market Value of a Plain Vanilla Swap from the Perspective

question 58

Multiple Choice

Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the upcoming payment is in 30 days,and there is one more payment 180 days after that.The fixed rate is 7 percent and the upcoming floating payment is at 6.5 percent.The notional amount is $15 million.Assume 360 days in a year.The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days) .

• A)the fixed payer pays $31,763.75
• B)the fixed payer pays $71,527.50
• C)the floating payer pays $49,500
• D)the floating payer pays $194,228
• E)none of the above

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Definitions:

Deposit Expansion Multiplier

A ratio that determines the maximum amount by which the money supply can increase through the banking system's process of lending out deposits.

Required Reserve Ratio

A regulation that sets the minimum reserves each bank must hold to customer deposits and notes, effectively the same concept as the reserve-requirement ratio but stated differently.

Commercial Banks

Financial institutions that provide services such as accepting deposits, providing business loans, and offering basic investment products.

Government Securities

Financial instruments issued by the government to finance its expenditures, including bonds, notes, and bills, that pay interest to investors.