Consider a Pension Fund Manager That Wishes to Convert $10

question 13

Multiple Choice

Consider a pension fund manager that wishes to convert $10 million from notes paying LIBOR to stocks,using an equity swap.The equity swap should be structured so that

• A) Pension fund receives LIBOR and pays an equity return based on notional principal of $5 million.
• B) Pension fund pays LIBOR and receives an equity return based on notional principal of $5 million.
• C) Pension fund receives LIBOR and pays an equity return based on notional principal of $10 million.
• D) Pension fund pays LIBOR and receives an equity return based on notional principal of $10 million.
• E) None of the above.

Recognize and distinguish between different types of breaches in contract law (minor, major, fundamental).

Identify the role and limitations of exemption or exclusion clauses in contracts.

Differentiate between conditions precedent and subsequent in contractual obligations.

Explain the significance of performance and tender of performance in fulfilling contractual obligations.

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Definitions:

Maturity

The final payment date of a loan or financial instrument, at which point the principal (and all remaining interest) is due to be paid.

Interest Rate Risk

The risk that changes in interest rates will adversely affect the value of an investment, particularly relevant for fixed-income securities.

Variable-Rate Assets

Assets that earn interest at rates which adjust over time based on prevailing market conditions.

Cash Equivalent

Short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.