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hi sir,
please could you explain these two points from this question.1)in order to calculate the interest receivable from the bank why are we using year 1 spot rates and the yr 2 to yr 4 forward rates? what is the reason behind the mix and match.
2)in part b (i) we are asked to prove whether liability will change or not after swap and the question used Yeild 3% and 5%
i just want to confirm that according to the theory am i correct to assume whether or not whichever combination of interest % i use the value would be similar?for instance say yeild 7% and 17%.thanks alot
I am sorry, but I am sat in an airport on my way home from a break and I don’t have the question Sembilan with me.
Please ask again tomorrow and I will then try and help you.
It is not a case of mixing and matching.
We need to know what rate of interest they will pay in the first year, in the second year, and so on.
The spot yield rates are the rates p.a. that are fixed for 2 year borrowing, for 3 year borrowing etc..
The forward rates are what we expect the actual interest rate to be in the second year, in the third year etc..
Yes – you could have used different rates (although it would be a bit extreme to use 17%! It is hardly likely that interest rates in this question would change that much!!
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