Arnbrook plc (jun 06 adated)

As explained in part (b) the company will save 0.5% due to the swap and so they will end up effectively paying interest of 5.7% initially increasing to 6.2% after 6 months. The discount factors are calculated using the formula as normal. So, for example, the discount factor for the saving in 18 months time (which is 1.5 years) is 1 / ((1.062)^1.5) This is the only time ever that an exam question has required 6-monthly discounting and I will be surprised if it is ever required again - the examiner has changed twice since this question was set.