Chapter 4 - 124 Understanding Yield Spreads d. The net...

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Cash outflow for the note issued Cash outflow for the swap Total cash outflow 7% 6-month LIBOR 124 Understanding Yield Spreads d. The net payment is equal to the floating-rate payment received by the fixed-rate payer less the fixed-rate pay- ment made by the fixed-rate payer. The quarterly fixed-rate payment is $170,000. In the table below, a nega- tive sign means that the fixed-rate payer must make a payment. If3-month LlBOR is Floating-rate received Net payment by fixed-rate payer 5.00% $125,000 -$45,000 5.50% 137,500 -32,500 6.00% 150,000 -20,000 6.50% 162,500 -7,500 7.00% 175,000 5,000 7.50% 187,500 17,500 8.00% 200,000 30,000 8.50% 212,500 42,500 17. a. The risk that the investor faces is that, if 6-month LIBOR falls below 5%, then the return from the floater for the 6-month period (on an annual basis) would be less than the 7% borrowing cost (the fixed coupon rate of 7%). Thus, the investor is exposed to the risk of a decline in 6-month LIB OR. In general terms, the investor is mismatched
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This note was uploaded on 11/06/2010 for the course ECON Econ taught by Professor Liasa during the Spring '10 term at University of San Francisco.

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Chapter 4 - 124 Understanding Yield Spreads d. The net...

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