Using the Final Maturity Discount Factor

Valuation Using the Final Maturity Discount Factor 

To understand this principal, consider figure 7.5, which shows the present value of both legs of the 5-year swap to be 2,870,137. The same result is obtained by using the 5-year discount factor, as shown in (7.18). 

FIXED PAYMENT 689,625 FLOATING PAYMENT 550,000 PV FIXED PAYMENT 653,672.99 PV FLOATING PAYMENT 521,327.01 

The first term in (7-18) represents the notional principal multiplied by the discount factor 1. This reflects the fact that the present value of an amount received immediately is the amount itself. 

The floating-leg payments of an interest rate swap can be valued using just the discount factor for the final maturity period and the notional principal. This short-cut method is based on the fact that the value of the floating-leg interest payments is conceptually the same as that of a strategy 

PERIOD 1 ZERO-COUPON RATE % 5.5 DISCOUNT EACTOR 0.947867298 EORWARD RATE % 5.5 

23 PERIOD ZERO-COUPON RATE % DISCOUNT EACTOR EORWARD RATE % 

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