Consider a plain vanilla fixed for floating interest rate swap with
a notional principal of 8,100,000 and annual payments. Initially the swap was supposed to last for five years and now three years remain. If the initial fixed rate is 0.08, LIBOR is 0.05, and the year three payment was just made (two years of payments remain on the swap), What is the absolute value of the swap?

 

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Bill, Jim and Shelly are all looking to buy the same stock that pays
dividends. Bill plans on holding the stock for one year. Jim plans on holding the stock for three years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

1. Bill will be willing to pay the most for the stock because he will get his money back in one year when he sells.
2. Jim should be willing to pay three times as much for the stock as Bill because his expected holding period is three times as long as Bill’s.
3. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence she will get the most dividends.
4. All three should be willing to pay the same amount for the stock regardless of their holding period.

I know the answer is D but I need a better understanding of the concepts and financial theory that justifies this answer.

 

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