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).