Another Interest Rate (Cap) Question

HA ha. You actually did the math. I was just guessing.

Ugh, now we gotta count days… WHERE WILL IT END!!!

30 days hath September, April, June, and November. All the rest have 31 but February’s the shortest one. With 28 days most of the time, until Leap Year gives us 29.

mwvt9 Wrote: ------------------------------------------------------- > 30 days hath September, > April, June, and November. > All the rest have 31 > but February’s the shortest one. > With 28 days most of the time, > until Leap Year gives us 29. Don’t forget about LEAP Leap year, which can occur every century or so. A true year is actually approx 365.26 days…

I may still be taking L3 the next time that comes around.

Can someone give me a run through of the caps again? So you determine the cap rate at initiation (which I would presume could differ (be lower) from the reference rate since the cap buyer is willing to pay the premium for the “in the money” 1st call in the cap?) and you pay in arrears (which im blanking on - means you determine the difference at the beginning of the reference rate reset period and pay at the end of the period?). I’m blanking on the discounting - you only know the payment you must make once rates reset, so you can only discount one payment right? So if, for example, on jan 1 the cap rate is 5% and the reference rate is 6%, for an semi-annual reset cap on $10,000,000 notional you have $50,000 you pay at the end of the term which you discount at 50,000/1.06^.5 = $48,564 ?? So I guess you would then invest the dicounted FV in an investment that earns the reference rate?

knuckles trick for the days in a month??? fist up your hands, left hand pinky knuckle is jan, all knuckles are 31 days, rest are 30, except feb is 28

hahaha…i came on the forum to post the exact same question…and just happened to notice mcleod’s title…half guessed it would be the same one - since he has earlier posted the interest rate call question from the same qbank shite! anyway… I wouldn’t have guessed the days…but I guess that’s already been discussed… mwvt and sbmfj…both your day count tricks is something I still use!!! :slight_smile: are we babies for doing that? or do most normal people just remember…april - yeah 30 …ah…boo to them…

In any other situation I would look on my phone, but I don’t think that will fly with CFAI.

Bump! Someone help a brotha out : )

yes…you seem to have it right…

got 22,500 then pick the closest one: A (consider the rounding of days)

That must be a Schweser question. Usually the question will mention the rate is tied to LIBOR or some type of rate where you use the (m days in the underlying/360) day count method. When a regular % rate is mentioned the CFAI tends to base it on the months (6/12; 3/12; 1/12, etc. ). That’s my understanding anyway.