Question: You Enter Into A Seven-year Interest Rate Swap, Annually Receiving (REF – 1.23%) On $20 Million (notional) Principal. REF Is A Reference Rate Associated With One-year Loans; The REF Rate Used For Each Annual Period Is That Prevailing At Year Start. Suppose The Reference Rate REF Takes The Value 2.11% In 12 Months, 2.01% In 24 Months, And 1.62% In …
You enter into a seven-year interest rate swap, annuallyreceiving (REF – 1.23%) on $20 million (notional) principal. REF isa reference rate associated with one-year loans; the REF rate usedfor each annual period is that prevailing at year start.
Suppose the reference rate REF takes the value 2.11% in 12months, 2.01% in 24 months, and 1.62% in 36 months. (Note: interestrates are compounded annually.) What is your cash flow (in dollars,including the sign) from the swap, in 24 months?
