Question 2

You have recently been appointed as a treasurer assistant in a large Australian company. Your company entered into a 10-year fixed-for-floating interest rate swap contract 2.5 years ago with a notional value of AUD 10,000,000.00. According to this swap contract, you agreed to pay floating-rate interest payments of BBSW + 25 basis points and receive fixed-rate interest payments of 0.9% on a semi-annual basis (interest rates here are annualized). The last interest rate payments have just been made. Your boss asks you to look at the expected cash flows associated with this swap and calculate the following metrics:

a) The present value of the swap

b) The number of years for which your company will receive positive and negative cash flows

After your presentation, your boss said that he would like you to fix the cash flows associated with this swap contract. So, he asks you to go to your investment bank and sign a new swap contract that could help with that.

c) What fixed-rate interest payment (in percentage points, annualized) you would pay or receive according to this contract if the floating-rate payments are the same (BBSW + 25 basis points) and the value of this swap contract at the initiation is zero?

• Note: enter a negative (positive) number if you pay (receive) a fixed-rate interest payment

For your calculations, use the term structure of interest rates from the picture below. These interest rates are continuously compounded. You can assume that interest rates in between term-to-maturity periods are increasing linearly.