1, Leveraged floater: To the issuer, paying m x LIBOR rate on notional principal NP is the same as "paying LIBOR rate on m x NP", where m>1. As a floater issuer, the company can
a) enter a swap as a fixed rate payer(fixed rate=FS). --- doesn't like to pay floating-rate.
b) buy a fixed-rate bond with coupon ci; --- to invest with the proceeds.
In case of leverage floater, just use (m x NP) as the notional principal. So, the net cash flow is:
(ci-FS)*(m x NP)
2, Inverse floater: To the issuer, paying (b-LIBOR) rate on notional principal NP is the same as "paying fixed-rate b and receiving LIBOR on NP". To receive the fixed-rate, the issuer can
a) enter a swap as a fixed rate receiver(fixed rate=FS).
b) buy a fixed-rate bond with coupon ci;
Now the net cash flow is:
(ci+FS-b)*NP
=================================
To keep it simple, I assume the coupon is paid annually. The notation of (ci, FS) is from the book...A diagram also helps...note that:
1) the issuer usually likes the fixed-rate: pay or receive;
2) the issuer buys a fixed-rate bond, which will "lock" the rates. (taking risk as well).
Edited 3 time(s). Last edit at Monday, May 16, 2011 at 07:03AM by deriv108.作者: justin88 时间: 2011-7-11 19:23
3) In a leverage floater, the issuer(borrower) shall pay the principal of (m x NP) at the end.作者: thommo77 时间: 2011-7-11 19:23
Correction:
3) In a leverage floater, the issuer(borrower) shall pay the principal of (NP) at the end.
