Quiz: leveraged floader planning, interest, payments, percent, paying

DoubleDip

Leveraged Floater. JMI has issued a $12 million leveraged floater with semi-annual interest payments. The rate is 1.2 times LIBOR. The firm is planning to hedge the risk of this note with a bond paying 6 percent and a swap with a fixed rate of 4.4 percent.


In Situation 4, the net semi-annual cash flow is closest to:
A) $115,200.
B) $230,400.
C) $96,000.

<need a break>

bkballa

A is correct based on CFAI logic

I do not agree how they present this lev. fl. hedge...

IAmNeil

Yes, it is A... Can someone explain?

I really dont understand them...

<need a break>

strikethree

alta168 Wrote:
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> You can refer to the text.


Good hint.... finally found the topic is not in notes!

bpdulog

So the bond amount should be the same as the swap notional?

Leveraged Floater issued means 1.2Libor liability on 12m
Swap on 14.4m = libor vs 4.4 = 1.2libor on 12m vs 5.28% on 12m
so we just need to finance the 4.4% on the 14.4m swap =0.6336m

We have 12m from issuance of the floater so shouldnt we just long a 12m 6% bond? which would cover the swap and leave 86,400 pa or 43,200 semi annual?

Unforseen

(6%-4.4%)*(1.2*12m)=$230,400.

semi-annual net cash flow: $230,400/2=$115,200.

bodhisattva

To me, this question is incomplete.

We're paying:

1.2*LIBOR on an inverse floater

Receiving:

4.4% on a swap

6% on a bond


Yet, the question doesn't specify the terms of the floating rate side of the swap. Is it LIBOR flat, or LIBOR plus a spread? Obviously, for hedging purposes we can assume the floating rate could be 1.2*LIBOR but that may be an unrealistic assumption.

NO EXCUSES

nannan66

you are wrong
leverage floater needs buy 1.2 x amount in bond and swaps it recieve semiannual 1.2x3% and pay 1.2x2.2% LIBOR offset so the answer is A



Edited 1 time(s). Last edit at Monday, May 16, 2011 at 08:59AM by goodman2011.

bboo

i try to remember in the leveraged floaters the floating payments cancel each other out and the net result is the difference between the fixed rate entities multiplied by the leverage factor (1.2)

thommo77

deriv108 Wrote:
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> SkipE99 Wrote:
> --------------------------------------------------
> -----
> > i try to remember in the leveraged floaters the
> > floating payments cancel each other out and the
> > net result is the difference between the fixed
> > rate entities multiplied by the leverage factor
> > (1.2)
>
> notes taken...concise and accurate.

I am with you...