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#1




interest rate swap question
A reinsurance company enters into a threeyear interest rate swap, making annual payments on a notional amount of 2,000,000. The company pays LIBOR plus 0.50% and receives fixed payments under the swap.
The threeyear annual effective treasury yield is 2.00% and the swap spread is 0.20%. The current oneyear annual effective LIBOR spot rate is 1.00%. Calculate the net interest rate swap payment to be received by the reinsurance company in the first year of the swap. (A) 14,000 (B) 20,000 (C) 24,000 (D) 40,000 (E) 44,000 Quote:
Last edited by Futon; 11122017 at 05:30 PM.. 
#2




1. Reducing risk exposure to interest rate changes: Let's say the reinsurer has floating rate assets and fixed rate liabilities. If rates drop, that's bad for the reinsurer. With the swap, they turn their floating rate assets into fixed rate assets.
2. LIBOR is not a company, but a reference rate quoted in the market. 3. For the second year, the net payment will be (2.20  (LIBOR + 1.0%)) * 2,000,000. It depends on what the LIBOR rate is 1 year from now.
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"I'm tryin' to think, but nuthin' happens!" Last edited by Breadmaker; 11122017 at 08:58 PM.. Reason: Messed up the decimal on the swap spread 
#3




Quote:
1. So is LIBOR this fixed rate? 2. Right, so the company pays (2.20% × 2,000,000). Where does that money go? 
#4




1. No, LIBOR is a floating rate.
2. The fixed payment goes to the counterparts. That counterparty sends the floating payment to the reinsurer.
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