Problem:
A $50 million interest rate swap has a remaining life of 16 months. Under the terms of the swap, 6-month LIBOR is exchanged for a fixed rate of 7% per annum (compounded semiannually). The average of the bid-offer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The 6-month LIBOR rate was 4.6% per annum 2 months ago. Answer the following questions.
Required:
Question 1: Use bond approach to find the current value of the swap to the party paying floating.
Question 2: Use bond approach to find the current value to the party paying fixed
Question 3: Use FRA approach to find the current value of the swap to the party paying floating.
Question 4: Use FRA approach to find the current value to the party paying fixed.
Note: Explain all steps comprehensively.