CFA Examination Level II-To protect the value of the Star Hospital Pension Plan’s bond portfolio..
Chapter 23 question 2 2. CFA Examination Level II To protect the value of the Star Hospital Pension Plan’s bond portfolio against the rising interest rates that she expects, Sandra Kapple enters into a one-year pay fixed, receive floating U.S. LIBOR interest rate swap, as described in the following table. U.S. LIBOR Interest Rate Swap Terms 1-year Fixed Rate (annualized) 1.5% 90-day U.S. LIBOR Rate [L0(90)] (annualized) 1.1% Notional Principal $1 Day Count Convention 90/360 ________________________________________ Note: Li(m) is the m-day LIBOR on Day i. Sixty days have passed since initiation of the swap, and interest rates have changed. Kapple is concerned that the value of her swap has also changed. The U.S. LIBOR term structure and present value factors of interest rates are described in this table: U.S. LIBOR TERM STRUCTURE AND PRESENT VALUE FACTORS (60 DAYS AFTER SWAP INITIATION) U.S. LIBOR Term Structure (annualized) Present Value Factors L60(30) = 1.25 percent 0.9990 L60(120) = 1.50 percent 0.9950 L60(210) = 1.75 percent 0.9899 L60(300) = 2.00 percent 0.9836 ________________________________________ Note: Li(m) is the m-day LIBOR on Day i Calculate the dollar market value of the interest rate swap entered into by Kapple, at 60 days after the initiation of the swap and using a $1 notional principal. Show your calculations.
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