leveraged floater payments, interest, planning, net, 400

John10

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. The net semi-annual cash flow is closest to:

A) $115,200.

B) $230,400.

C) $96,000.

please show your cal and explanation. Thanks!

Zestt

i feel there something missing out here ... JMI has a 'pay floating' obligation in first place.

to hedge, he must take the 'receive floating, pay fixed' side. there's no info on any receive floating leg of transaction. ???

strikethree

B) 230,400

(0.06-0.044)*1.2*12,000,000

Just made it all up, no idea really

jmh530

Its C for sure...

$12 mio * [(6% - 4.4%)/2]

NakedPuts2011

A.

Its a leveraged floater so the swap and fixed bond cant have the same NP as the leveraged floater. it needs to be x up by 1.2.

The swap will have a 14.4m NP with Libor on the one leg and fixed on the other of 4.4%. This libor will cancel with the leverage floater libor. leaving the two fixed rates of 6% and 4.4% on a NP of 14.4m.

The annual receipt is 230,400. The semi-annual receipt is 115,200.

Roflnadal

level3aspirant Wrote:
-------------------------------------------------------
> i feel there something missing out here ... JMI
> has a 'pay floating' obligation in first place.
>
> to hedge, he must take the 'receive floating, pay
> fixed' side. there's no info on any receive
> floating leg of transaction. ???


They have a floating obligation from the leverage floater. to fully hedge they purchase a swap but the fixed leg needs to be hedged as well with a fixed bond purchase.

Not very well worded question really.

canadiananalyst

Thanks chedges..

Analyze_This

semi-annual....rtfq

former

I say B...I have to draw out the diagram in my head as they have it in the text to remember how to do these, but here is the derivation:

Leveraged Floater:
-(1.2)(L)(12MM)

Bond:
+(1.2)(12MM)(.06)

Swap:
-(1.2)(12MM)(.044)
+(1.2)(L)(12MM)

Netting we get:

(1.2)(12MM)(.06-.044) = $230,400 = B

best,
TheChad

skycfa

semi-annual !