Question

Tommy purchases a deferred interest rate swap with a term of five years. Under the swap, there is no swapping of interest rates during the first two years. During the last three years, the settlement period will be one year. Under this swap, Tommy will be the payer. The variable interest rate will be based on the one year spot rate at the start of each settlement period. The notional amount of this swap is 500,000. Calculate the swap rate for this swap. 1 4.3% 2 4.6% 3 5.1% 4 5.4% 5 5.6%

Answer 1

TIME t	SPOT RATE Rt
1	0.043
2	0.046
3	0.051
4	0.054
5	0.056

R = P ₂ - P ₅

P₃ + P₄ + P₅

= (1.046)^-2 - (1.056)^-5

(1.051)^-3+(1.054)^-4+(1.056)^-5

=0.06266 = 6.27%

NOTE - i dont know how to form equation in this board but you can understand this at ease if not comment me down i will assure to make to understand.