From the course: Derivatives Fundamentals
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Interest rate swap pricing: Excel demonstration
From the course: Derivatives Fundamentals
Interest rate swap pricing: Excel demonstration
- [Instructor] Let's build a table that shows the payments on an interest rate swap. Our inputs are in blue font. The notional amount of the swap is a million dollars. The fixed leg is 5.25%. We're going to pay the fixed leg of interest every six months. So I've put here twice a year. The floating leg is based on LIBOR, and the floating leg payment frequency is also every six months, which is why I've put a two. In practice, it's quite common for the fixed leg of an interest rate swap to be every six months, whereas the floating leg is every three months. So we'd enter the number four here instead of a two. We're also going to assume that six month LIBOR starts at 5%, but every six months is changing. Now in practice, we would only know these rates at the end of the swap or as we approach the following six months. But let's just assume those are the LIBOR rates over the swap. We're going to start by working on the fixed leg, starting in row 25. Then we'll move to the floating leg, and…
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