I hope you can help me.

So let say we have an interest rate swap, with the following characteristic:

Start in 30/06/2015. End in 02/07/2019

It has fixed payment every year, and floating every half year.

The floating leg = From Hull (2012) the floating leg is just set equal to the notional, if we just have had a payment.

However, the fixed leg: Due to weekends, in ex. year 3, the fixed payment will be done 02/07/2018.

Fixed leg have day count convention: 30/360.

So basically, do we change the discount factor and the payment because of the extra 2 days?

Instead of year 3, we will have year 3.005 to discount the cash flow. (using the convention actual/365 -> have read this was normal)

and do we change the payment as well? Can we get 1.005 * Notional * Swap rate. (30/360) -> again we are two days late?

One more question: I am currently using the Vasicek model to find the discount factors. But I have read, that some uses the LIBOR rate instead?

Do you have any experience regarding this ??


The floating rate used to determine the interest payment in any given float leg roll depends on the fixing appropriate to the start of the roll. So if the only change to this IRS structure is to extend the final roll by 2 days, then that final rate will just be calculated to include the extra days using the day count convention, and that payment will be discounted from the slightly further payment date.

However, some things you mention suggest that you are not calculating separate forward and discount rates (I.e. using traditional textbook method), so you will first need to construct a curve of forward rates using multiple swap maturities in order to work out what the final float fixing will be.

In any case, for a longer maturity swap, I would expect 2 days to make less difference than the bid-ask spread, particularly for a buy-side actor.

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