# Schweser practice exam 3 pm: how to solve it? derivative.

If a 1 year libor at the end of year 2 is 5.8%, the value of a long position in the 2-year, 6%, 30mil interest rate floor at the end of year 2 is closest to: A. 185k B. 195K C. 270k D. 375k

Yes i couldn’t figure that one out too…someone help and explain!

wait a minute those arent the answers!!

is the answer 60k?

u have to discount it with the libor… this is an FRA question … u have to discount it to the period until the payment date… which is the last day of the term loan…so 60/(1+0.58)^1 (0.060-0.58)* 30m = 60k so 60/(1+0.58)^1=56.711

.

an interest rate floor is not the same as an fra

cfasf1 Wrote: ------------------------------------------------------- > an interest rate floor is not the same as an fra? sorry yeah your correct but u still need to discount it though

cfasf1 Wrote: ------------------------------------------------------- > an interest rate floor is not the same as an fra? sorry yeah your correct but u still need to discount it though because floors and caps are also paid at the final date of the term loan…

why would you need to discount it? your payoff isn’t a year out.

OK - if that is the case then the payoff is 60K and the value = 60*discount factor? Can someone confirm the answers given though.

Dude thats not even the question! There was way more to the problem then that, what you wrote up there was actually put in as a distraction. Earlier in the vin, it said there is a \$30m notional 1 yr floor @ \$90k and a \$30m notional 2 year floor for \$285k. Both have anual payments. The value of a floor at the end of yr two is the difference. 195k

i’m pretty sure on this… you’re not going into a year long loan with an interest rate floor. the payoff is at the end of year 2. but what’s with the random answers on the original post? are we way off?

AFJunkie Wrote: ------------------------------------------------------- > Dude thats not even the question! > > There was way more to the problem then that, what > you wrote up there was actually put in as a > distraction. Earlier in the vin, it said there is > a \$30m notional 1 yr floor @ \$90k and a \$30m > notional 2 year floor for \$285k. Both have anual > payments. > > The value of a floor at the end of yr two is the > difference. 195k well, sh*t.

ahmadmaghfur got it right. I guess I do not understand the question. Say 1 yr libor at the end of year 2 means the rate between year 2 and year 3 is 5.8%. But the floor lasts from year 2 to year 4. (2 yr floor at the end of yr 2.) This does not make a lot of sense to me.

CFA monster if this is question 93 on exam 3pm the answer is C and ahmad has got it right with this explanation. The answer you posted was the answers to #94. I think you need to go to sleep now

that was kind of left out in the original post.

u still have to discount it… its in the schweser book 5 page.247-249… its discounted…

i know he is right and c is the ans. but i have problems understanding the question. the duration of the libor rate and the floor does not match.

CFAMonster Wrote: ------------------------------------------------------- > ahmadmaghfur got it right. > > I guess I do not understand the question. Say 1 yr > libor at the end of year 2 means the rate between > year 2 and year 3 is 5.8%. But the floor lasts > from year 2 to year 4. (2 yr floor at the end of > yr 2.) This does not make a lot of sense to me. i just went off of this original post. did not look at the acutal vignette. no way for me to know that the floor lasts from year 2 to year 4.