A corporation enters in a five-year interest rate swap along with a swap bank wherein it agrees to pay the swap bank a fixed-rate of 9.75 percent annually on a notional amount of DM15,000,000 and attain LIBOR - ½ percent. As of the second reset date, find out the price of the swap from the corporation's point of view, assuming that the fixed-rate at which it can borrow has enhanced to 10.25 percent.
On the reset date, the current value of the future floating-rate payments the corporation will attain from the swap bank depend on the notional value will be DM15,000,000. The current value of a hypothetical bond issue of DM15,000,000 along with three remaining 9.75 percent coupon payments at the new fixed-rate of 10.25 percent is DM14,814,304. This sum revel the present value of the remaining payments the swap bank will attain from the corporation. Therefore, the swap bank must be willing to purchase and the corporation should be eager to sell the swap for DM15,000,000 - DM14,814,304 = DM185,696.