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for future costs was 3.5 percent for 1992 and the first three
quarters of 1993 and 4 percent for the fourth quarter of 1993.
These inflation factors were consistent with the inflation
factors built into FNBC’s budgeting process. The present values
of these estimated expenses, as adjusted by the inflation factor,
were computed by using the same zero-coupon yield curve that was
used in computing midmarket value.
In order to reflect the fact that its swaps matured, FNBC
(through its finance department) prepared a roll-off schedule
showing the number of its swaps that matured each year and, going
forward, the number of those swaps that would be in place each
year until the entire portfolio had matured. The roll-off
schedule was used to estimate the number of years that FNBC would
be incurring expenses for swaps that had not yet terminated. In
the later years, the estimated costs were reduced in proportion
to the declining number of swaps that would still be in
existence. The maturity estimates did not take into account the
percentage of FNBC’s swaps that were bought out each month.
The present values of the expenses, after they had been
adjusted for inflation, were then allocated between the swap
portfolio and the interest rate guarantee portfolio. FNBC then
attributed to the existing swaps the percentage of the resulting
estimated expenses, as adjusted, that bore the ratio of the
existing swaps to total swaps. The amount of the difference
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