#### Eustice_Langham

##### Active Member

"We can value this swap as two bonds (see upper panel below). Although it might be easier to recognize that the exchange in three months will be zero, such that only the cash flow at nine months needs to be evaluated: The floating rate pays 0.5 * $400 million * 2*[exp(0.0220/2)-1] = $4.42429 million and the fixed rate pays $6.00; so the future (and final) net cash flow exchange is $1.57571, which has a present value of $1.54993 million."

My questions are as follows:

1. Why does only the 9 months CF need to be evaluated? I would have thought that the 3 months CF should be evaluated as well.

2. Why is the fixed rate of only $6.00, this is only the interest cost, if a final payment should the amount be $406m? I have calculated the final fixed payment as follows: 406m/(1+.02)^.75]

3. I notice that your solution also contains discount factors, how were they calculated and finally, the PV amount of 1.54993, can you clarify how this was arrived at?

Thanks