Question

A fixed-to-floating interest rate swap on a notional principal of $5 million carries a fixed rate of 8.0% p.a. What is the (net) settlement amount paid by the “swap buyer” on the next quarterly swap payment date if the floating rate observed on the last swap payment date was 6.0% p.a.? (a) $300,000 (b) $100,000 (c) -$75,000 (d) $25,000.

Answer 1

Swap buyer will pay at fixed rate of 8% and receive  at floating rate.of interest

Amount payable    at 8% fixed rate for quarterly swap payment date=$5,000,000*8%*(1/4)=$100,000

Amount receivable at 6% floating rate =$5,000,000*6%*(1/4)=$75,000

(net) settlement amount paid by the “swap buyer”:

$100,000-$75,000=$25,000

ANSWER:

(d)$25,000