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Suppose the 1-year effective annual interest rate is 4.6% and the 2-year effective rate is 3.2%....

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Finance

Suppose the 1-year effective annual interest rate is 4.6% andthe 2-year effective rate is 3.2%. Compute the fixed rate in a2-year amortizing interest rate swap based on $440,000 of notionalprincipal in the first year and $240,000 in the second year.

Please show steps

a. 4.11%

b. 3.91%

c. 4.69%

d. 3.22%

e. 3.63%

Answer & Explanation Solved by verified expert
3.7 Ratings (347 Votes)
The interest rate swap comprises of two legs the floating interest rate leg which has 46 as interest for Year 1 and 32 as interest for Year 2 and the fixed lege whose interest rate needs to be determined This interest rate of the fixed leg is known as the interest swap rate The initial notional is 440000 for the first year and amortizes to 240000 for the second year The total swap tenure is 2 years The fixed interest swap rate is that interest rate on the    See Answer
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Transcribed Image Text

Suppose the 1-year effective annual interest rate is 4.6% andthe 2-year effective rate is 3.2%. Compute the fixed rate in a2-year amortizing interest rate swap based on $440,000 of notionalprincipal in the first year and $240,000 in the second year.Please show stepsa. 4.11%b. 3.91%c. 4.69%d. 3.22%e. 3.63%

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