WarrenB1

issues a leveraged floating-rate note
you pay: $5M*2.5*LIBOR ie. $12.5M*LIBOR
To offset the $12.5M*LIBOR, you enter into swap
The swap
You pay: 6% (fixed rate) on $12.5M
You receive: LIBOR on $12.5M
Net position (swap+leverage floating rate note issues)
=$12.5M(LIBOR-LIBOR-6%)
= you pay 6% on $12.5M
As you bought a bond
You receive: 7% on $12.5M
Overall Position:
= you pay 1% on $12.5M = $0.125M
= You enter a swap of 12.5M and not 5M because you receive LIBOR from swap only and not 2.5*LIBOR. To offset the 2.5*LIBOR, you increase the NP to 5*2.5 = $12.5M