Swaps: error in the curriculum

A couple of weeks ago I was tutoring a candidate from Riyadh, Saudi Arabia who had come to Southern California for a short vacation. (Some vacation: studying for Level II!)

We were working the EOCs for reading 40 and came across an error in the data for questions 8 – 16: if you use the present value factors in Exhibit 1 to calculate the 2-year swap fixed rate, you get 1.1242%, not the market rate of 1.00%.

I just heard from CFA Institute: they agree that it’s an error, they’ll post an erratum about it, and they will correct it in the 2019 curriculum.

I can’t find such error in my curriculum. Can you be more precise please?

In the reading 40 EOCs, questions 8 – 16, you’re given Exhibit 1 (p. 351) with these PV factors:

  1. 0.990099
  2. 0.977876
  3. 0.965136

You’re further told that the current equilibrium 2-year fixed swap rate is 1.00%.

However, if you use the first two present value factors to compute the equilibrium 2-year swap fixed rate, you get:

SFR = (1 − 0.977876) / (0.990099 + 0.977876)

= 1.1242%

In short, they’ve given you a swap fixed rate (1.00%) which creates an arbitrage opportunity.

thanks. are you a robot?

Only on Sundays and holidays.