If it comes in the AM I will pretend to solve it using the formula/steps and probably score 50%-75% of total marks.
If it comes in the PM i will choose B and use the time saved to solve an entire item set somewhere else.
Ridiculously time consuming and nerve racking.
Feel the same way about Implementation Shortfall
Come on! You got this.
Notional of the loan
$ FV of Premium calc (use today LIBOR + spread and days UNTIL loan / 360)
$ Interest Cost calc (use new LIBOR + spread and days IN loan / 360)
$ Call/Put Payoff (use new LIBOR (no spread) and days IN loan / 360)
Net $ Interest Cost = 3 - 4 *(+ for puts)
EAR = [(1 + 5) / (1 - 2)]^365/days - 1 *(1 + 2 in denominator for puts)
The LIBOR rates to use follows logic, and I’m sure you can calculate the option payoff in your sleep. Most likely we get a call option, but if it’s a put just remember add instead of subtract. I found numbering the steps and doing the math by the step numbers to be easier to remember.
Someone who loves GIPS can love EAR too!
I have come across this 10-15 times during mocks/topic tests. While I know the broad algorithm I seem to get the wrong final answer every single time.
It will come down to how much time is left at the end of the exam. If time is plenty will tweak here and there until I get correct answer otherwise the marginal marks scored per minute spent on this question must be the lowest in the whole curriculum.
That’s cool. Get your points where it works best for you. To me though, it just seems like something the CFAI would love to test, and is fairly straightforward if you follow the steps and practice it a few times. Of course, because I’m saying this it won’t show up anywhere on the exam, and I’ll be driving home thinking … krok 1 , jay 0
@ Kroki
Don’t punt it, mate. So far you solved:
Pedal to the metal and crush it…
haha you guys made me review this today… I sorta hate you all now 
did you remember to review all the plan types for IPS?
every other year it’s been Pension or Foundation. Ever 4 years they’ve added a second bonus insurance IPS. But banks have never been tested before… I bet a bank IPS will show up
considering I work at a bank, I better get it right, otherwise I might as well just show myself out the door and never show my face ever again… RIP…
It’s honestly not that bad…as other mentioned…time consuming as all get out…but not terrible. Now if we get a caplet/floorlet…yeah.
Make sure: If you purchased a call (Borrower), ADD that to the Loan.
If you purchased a put (lender), Subtract that from the loan.
Don’t forget to ANNUALIZE the Effective Interest rate. That part screws me every dang time.
last year i was sure this question would come up and made sure to OWN it… and it did for the first time in AM…I got it right but still failed (band 9)… so theres that
its a good question to move the exam curve as most candidates will get it wrong.
more interesting is the caplets/ floorets (sp) calculations that comes up in a BB but I have yet to see on any practice question
Learning this now - sure is difficult!
Think I skipped over the formulas but doing Montero and Mink topic tests are really bringing it home.
I think this will really be a good differential if we learn it!!
I was doing this question in 2012 mock. I knew the calculations very well but still it ate lot of time. I would just skip this question to save time and deal with it in the end.
it took me a morning of topic tests to figure this out but now it’s second nature. Teach me contingent immunization and I can teach you this 
Is the denominator correct in the formula? Would you subtract FV of premium for call?
Yes you would.
When you take out a loan, and buy a call to protect against floating rates moving higher, your effective loan proceeds are reduced by the FV of the call premium. So you subtract it from the loan proceeds in the denominator.
When you make a loan, and buy a put to protect against floating rates moving lower, the effective amount loaned increases by the FV of the put premium. So you add it to the amount lent in the denominator.
Subtract for calls, add for puts.
If it’s easier you can look at it like cash inflows and outflows and subtract the FV if it is a call or put.
Call:
+Inflow, you are borrwing
-FV Cost of call
Put:
-Outflow, you are lending
-FV Cost of put
negative minus a negative makes it add.
Caps and Floors is harder concept than IR Calls and Puts but both are not difficult.
i’d take a question like this on the AM. should get solid partial credit at a minimum
I would like those to appear in AM.