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Video instructions and help with filling out and completing irs interest rates 2020-2021
Now in this video we'll look at the valuation of interest rate swaps so three years ago you entered into a hundred million dollar notional five-year pay fix LIBOR base interest rate swap with a no resets this based on the thirty over 360 take out now the fixed rate in the swap contract and two years ago was three percent now currently the information on LIBOR are as follows we have a tree as maturity from one to entry and then these are the LIBOR for one year two years in three years so you are required to calculate the value of the interest rate swap for the party that's paying the fixed rate so let's get this desiccated situation so two years ago when you enter into this contract okay it was to pay three percent and then you will receive LIBOR okay so we know me receive LIBOR and then you will pay three percent so the light bulb will be based on the floating rate after being reset every year and then of course in your fall you will receive float and pay LIBOR and then same thing for year five okay you will receive level and pay fixed now of course two years have passed so now you're at year two so there's three more years to go so you want to value the swap as of year two so in this case you will have to assume that we are going to close the contract so when you close the contract you have to enter into an offsetting position so it's to offset it we have to go against what we did in the first place so originally we did a pay three percent so now we have to receive fixed all right so how we gonna get the fixed rate as of year two so what we need to do is based on the current rate at year two we will calculate the fixed swap rate as of today based on these Libor rates now based on what is covered in the last video that I did on pricing interest rate swaps so we're going to calculate the present value of these three Libor rates so for the PV of the one-year rate there will be one over one plus two point five percent multiplied by one year so that will be equal to one plus zero point zero two five one and then we invert it so that's zero point nine seven five six I'll store it into number one store one so there's zero point nine seven five six and then for the pv of the two year LIBOR that's one over one plus three point seven percent times two so that will be equals to 1 plus zero point zero three seven times 2 and then we invert it so that's zero point nine three one one so I'll save it under number two so this is zero point.