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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

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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

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