The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the appropriate variable rate is 7%, the fixed rate is 8%, and the interest payments are netted. The fixed-rate payer, counterparty B, pays according to:
(Swap Fixed Rate – LIBOR
t-1)(# of days/360)(Notional Principal).
In this case, we have (0.08 - 0.07)(360/360)($100 million) = $1 million
Given the above diagrams, which of the following statements is CORRECT? At time period 2:
