

FlashChat  Actuarial Discussion  Preliminary Exams  CAS/SOA Exams  Cyberchat  Around the World  Suggestions 
Salary Surveys 
Health Actuary Jobs 
Actuarial Recruitment 
Casualty Jobs 
Financial Mathematics Old FM Forum 

Thread Tools  Search this Thread  Display Modes 
#1




Intrest Rate swap question
I have a question on #11 from the interest rate swap online reading (https://www.soa.org/Files/Edu/2016/e...rateswaps.pdf) for the FM exam.
ABC Life Insurance Company enters into a oneyear interest rate swap with a notional value of 10 million. Under this swap, ABC will pay a variable interest rate each quarter and in return will receive a fixed interest rate each quarter. The variable interest rate will adjust each quarter to be the threemonth spot interest rate at the start of each quarter. Part d) is having me find the net interest payment after the first quater. The definition for the net interest payment is (amount of interest owed)+(net swap paid)(net swap received) In this problem the original loan of 10 million has a fixed rate and we are swapping it for a variable rate. So the amount of interest owed should be based on the fixed rate. The fixed rate in the problem was found to be .0033555 so the interest we owe on the loan at the first quarter is 33555. We also found that the first quarter variable rate that we are swapping to is .0024907 which means that we pay the counter party 24907 but receive 33555 from the counter party which means we receive a net swap payment of 3355524907=8648. So the interest owed on the loan = 33555 our net swap payment received is 8648 we have no net swap payment so our net interest payment is 335558648=24907. This isnt the answer given. They say the interest owed on the load is 24907 and we make a net swap payment of 8648 which means the net interest payment is 24907 + 8648 = 33555. I feel like this answer doesn't make sense because we are not paying the 8648, we are receiving it from the counter party. Also 24907 isn't the interest owed on the loan for the first quarter, that is what we are paying after we agree on a swap, the interest on the loan is 33555. I was hoping someone could explain this problem to me. 
#2




I will be watching this thread because I hate this portion of this exam, and I too believe it is a typo because ABC should be receiving the $8,700 (rounding) and not paying it out.

#3




If you look at the study note at example 9 and exercise 13 you can see they found the net interest payment by the way I reasoned above which makes me think it might be a typo for their answer in exercise 11. In example 9 and exercise 13 they take the interest owed to the lender (before a swap was arranged) and then add the swap payment if we make a payment to the counter party or they subtract the swap payment if the counter party makes a payment to us.

#4




Where is the information on the original loan?

#5




Seconded. I downloaded that pdf the OP linked to and I'm not seeing the problem as described.
__________________
Favorite Quote(s): Spoiler: 
#6





#7




The problem gives the terms of the swap. It says nothing about an "original loan" or even if there is one.

#8




Quote:
Example: "The variable rate will adjust each quarter to be the threemonth spot rate at the start of each quarter." Umm... yeah, those sound like forward rates. I would expect business types to be that sloppy with terminology, but for math professors and/or actuaries to write that problem using loose language like this is appalling. DEFN: "The tyear spot rate, denoted , is the rate of interest between time 0 and time t. Unless stated otherwise, assume that is an effective annual rate."
__________________
Favorite Quote(s): Spoiler: 
#9




OK, so I finally managed to dissect this problem. What a royal PITA! Even worse than I thought.
__________________
Favorite Quote(s): Spoiler: 
#10




I think this edit of the problem is much more clear and precise.
Also, when learning a topic, the answers required by the problem writer should flow in a natural order designed to hint at an approach. (11) ABC Life Insurance Company enters into a oneyear interest rate swap with a notional value of 10 million. Under this swap, ABC will pay a variable interest amount The spot interest rates at the time of the purchase of the swap are below: Table 1: (i) Determine the (ii) Determine the swap interest rate per quarter. (iii) Determine the net swap payment (iv) State whether ABC will make or receive the payment in (iii). Determine the
__________________
Favorite Quote(s): Spoiler: 
Tags 
interest rate swap, net interest payment 
Thread Tools  Search this Thread 
Display Modes  

