Question

A financial institution needs to build a LIBOR discounting curve for use in valuation. The

current 6-month LIBOR rate is 5.37% (semi-annual compounding). Swap rates (also under

semi-annual compounding) are given in the table below.

Maturity(years) Swap Rate

1 5.3300%

1.5 5.2400%

2 5.1500%

2.5 5.1200%

3 5.0900%

3.5 5.0850%

4 5.0800%

4.5 5.0850%

5 5.0900%

Please use these rates to determine the LIBOR / swap zero curve through 5 years, in terms of continuous compounding zero rates.

Answer 1

For  determining the LIBOR / swap zero curve through 5 years, in terms of continuous compounding zero rates we will first have to convert the semi annually compounded rate of interest into effective annual rate of interest and then convert it into continuously compounded rate of interest.

year I LIBOR /swap Maturity Effective Rate of Interest Continuously compound Rate of Interest ett = 2.113304** = 5.55% 5.33% (1 + 0.05 33 | 1 2 e__5.40%. 1.5. 5.24% 5.314 5.4 57 5.15% 5.227, 5.357 5.12%. 5.19% 5.33% 5.08% 5.15%. 5.29% 3.5 5.085% 5.15% 5. 291. 5.08.%. 5.14% Ş. 284, 5.085% 5.15% 5.29% 5.09% su15 % S. 291. ------ ca Scan heelwith CamScanner