To protect the value of the Star Hospital Pensions
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To protect the value of the Star Hospital Pensions
2. 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
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 calcula- tions. (Note: Your calculations should be rounded to 4 decimal places.)
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