Leveraged Floater Example in CFA book payments, capital, LIBOR

yodacaia

Pg 489 of Volume 5. If says this transaction requires no capital. I can’t see how that is the case. You issue a floater that pays 1.5x LIBOR.
Lets say you issue a 100MM issue with payments of LIBOR x 1.5
Then, it says you buy a bond from American Factories with face if 1.5x FP = 1.5x 100MM = 150MM
Where does the 50MM come from?

Windjam

In a swap transaction, you never borrow money… you simply pay the net interest payments.. 150M is just a notional amount that the interest payments are based on.

DarienHacker

That is the explaination given in the example as well.
However, the cash proceeds from raising the Floater would not be 150Mn, it would rather be 100mn. This means that either one has to purchase bonds which are in deep discount or borrow more money.
Thus there should be a borrowing cost also involved. I think that has been ignored.
This problem has troubled me a lot but now I’ve gave up and just memorised it.

ASSet_MANagemen

To be able to cancel out your LIBOR payments against LIBOR receipts, you need a notional principal of 1.5x100MM.. does this help?

brain_wash_your

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