Of course, a little more than 300 basis points...

CFA Level III
#1

What is this “a little more than 300 basis points…”? Why not exactly 300 basis points?

This sentence has been shown in the following 3~4 interest rate options examples.

Thanks.

#2

maybe hedging against the possibility of an errata :stuck_out_tongue:

#3

300 basis pts is the add on to the LIBOR but is applied to a LIBOR in arrears. So at the end of the loan the 3% has earned interest as well.

#4

angry

#5

I like that…

#6

Thanks, cp. That makes sense for the interest rate call.

Does it apply to interest rate put (P443, EXAMPLE 12) also?

#7

yes

#8

For the put as well. The same concept appears.

Lender is paying the 100 basis points + LIBOR in arrears.

For the call - the borrower is paying 300 basis points + LIBOR in arrears.

#9

Thanks cp, I got it! I’m not sure if this is relevant or not. I’m using notes, and the result of interest rate put options example (book4, page 201) looks slightly different from example 12 of CFAI book. In notes’ example, effective interest rate > LIBOR + spread, while In the curriculum, effective interest rate < LIBOR + spread.