in an interest rate swap is computed. Given the floating-rate payments and the present value of the floating-rate payments, the swap rate can be deter- mined by using the principle that the swap rate is the fixed rate that will make the present value of the fixed-rate payments equal to the present value of the floating-rate payments. Finally, we will see how the value of swap is determined after the inception of a swap.   Calculating the Floating-Rate Payments For the first floating-rate payment, the amount is known. For all subse- quent payments, the floating-rate payment depends on the value of the reference rate when the floating rate is determined. To illustrate the issues associated with calculating the floating-rate payment, we will assume that   ■ a swap starts today, January 1 of year 1(swap settlement date) ■ the floating-rate payments are made quarterly based on "actual/360" ■ the reference rate is 3-month LIBOR ■ the notional amount of the swap is $100 million ■ the term of the swap is three years   The quarterly floating-rate payments are based on an "actual/360" day count convention. Recall that this convention means that 360 days are assumed in a year and that in computing the interest for the quarter, the actual number of days in the quarter is used. The floating-rate pay- ment is set at the beginning of the quarter but paid at the end of the quar- ter-that is, the floating-rate payments are made in arrears. Suppose that today 3-month LIBOR is 4.05%. Lets look at what the fixed-rate payer will receive on March 31 of year 1-the date when the first quarterly swap payment is made. There is no uncertainty about what the floating-rate payment will be. In general, the floating-rate payment is determined as follows:   no.ofdaysinperiod ----------------------------------------------------- 360     In our illustration, assuming a non-leap year, the number of days from January 1 of year 1 to March 31 of year 1 (the first quarter) is 90. If 3- month LIBOR is 4.05%, then the fixed-rate payer will receive a floating- rate payment on March 31 of year 1 equal to:   $100,000,000´0.0405 ´--9----0--- 360 = $1,012,500