This is EOC, LOS40, Schweser question #11 A bank entered into a $5,000,000, 1-year equity swap with quarterly payments 300 days ago. The bank agreed to pay an annual fixed rate of 4% and receive the return on an international equity index. The index was trading at 3,000 at the end of the third quarter, 30 days ago. The current 60-day LIBOR rate is 3.6%, the discount factor is 0.9940, and the index is now at 3,150. The value of the swap to the bank is closest to:
Is this a poorly worded questions? The part with fixed rate payments confuses me. Not sure Why it says “with quarterly payments 300 days ago.” Why can’t they just say quarterly payment was made 30 days ago, and another one will be made in 60 days? What are your thoughts? Also lets talk about how crappy the derivative section is on L2. This section isn’t easy to read at all.
Lol man I remember how bad I thought L1 derivatives was. In comparison…L2 derivatives ain’t even English! I did a first pass of it and am gonna leave it for last review because i’m gonna need all the short-term memory help I can get.
As for the question, it’s a Schweser question so I wouldn’t be too concerned at any potential obscurity as third party providers occasionally have this. If it’s an unclear CFAI EOC however, now that’s a problem.
The reason they can’t say the last payment was made 30 days ago and theres another payment in 60 days, is because that doesnt tell when the swap is done and doesnt tell how many quarterly payments are left. By saying 300 days, you know there’s been 3 swap payments and 1 remaining. But yes the english grammar is a little off, maybe needs a comma for clarification.
You thought that was a poorly worded question/ How about this one from Schweser:
What effect will an increased discount rate and increased expected rate of return have on a company’s projected benefit obligation (PBO) and accumulated benefit obligation (ABO) as reflected in the financial statements?
A.) Only one will increase.
B.) Both will decrease.
c.) Both will increase.
What does _ Both _ refer to? The discount rate and expected rate of return, or the projected benefit obligation and the accumulated benefit obligation?