Economics

 

Q3. Please show the net present value calculation for the following plain vanilla interest rate swap.

Interest rate swap:

Pay Leg

Receive Leg

Notional

CAD 100 million

CAD 100 million

Effective Date

10/01/2021

10/01/2021

Maturity Date

10/01/2022

10/01/2022

Coupon

2%

3-month CDOR flat

Pay frequency

Semi-Annual

Semi-Annual*

*CDOR coupons are not compounded.

Rates:

Pay Date

CDOR Float

Discount Factor

01/01/2022

0.64

0.98

04/01/2022

0.68

0.96

07/01/2022

0.70

0.94

10/01/2022

0.76

0.92

Please fill in the cash flow and PV for both legs.

Pay Date

Pay Fixed Leg

Cash Flow

Pay Fixed Leg PV

Receive Floating Leg Cash Flow

Receive Floating Leg

PV

Net PV

04/01/2022

10/01/2022

Net PV of Swap

 

Q4. There is a requirement for funding a project with a 20-year term. If the only two choices are:

Choice a) – issue a bond at 2.4% maturing in 20 years,

OR

Choice b) – issue short-term debt at 1% maturing in 2 years with the intention of repeatedly rolling the debt to another 2-year term until the end of the 20 years.

Comment on the difference in the duration`sdt of the two choices and identify two risks that should be considered when selecting either a) or b).

 

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