As a pension fund manager, you anticipate that you have to pay out 8 percent on $100 million for the next eight years. The payment is made semi-annually. You currently hold $100 million of floating-rate note that pays LIBOR + 2.5 percent. What is your potential risk? To eliminate or reduce your risk, you arrange a swap with a dealer who agree to pay you 6 percent fixed, while you pay him LIBOR. The swap payment is made semi-annually as well. Determine your cash flow as a percent of notional amount at each payment date under this arrangement and assess if you have sufficient cash flow to pension fund holder

As a pension fund manager, you anticipate that you have to pay out 8 percent on $100 million for the next eight years. The payment is made semi-annually. You currently hold $100 million of floating-rate note that pays LIBOR + 2.5 percent. What is your potential risk? To eliminate or reduce your risk, you arrange a swap with a dealer who agree to pay you 6 percent fixed, while you pay him LIBOR. The swap payment is made semi-annually as well. Determine your cash flow as a percent of notional amount at each payment date under this arrangement and assess if you have sufficient cash flow to pension fund holder

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 4P

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