A company has $19 millions of fixed rate bonds outstanding, with a coupon rate of 10.6% paid semi-annually.

A company has $19 millions of fixed rate bonds outstanding, with a coupon rate of 10.6% paid semi-annually. The company also takes the floating payer position in a 7.5%/LIBOR swap with the same notional principal. What is the net cashflow associated with this synthetic floating rate loan, if the relevant LIBOR is 6.3%?

Please note that the notional principal is expressed in millions, but your final answer should be in terms of just Dollars (for example, if you calculated a cashflow of $100,000 (one hundred thousand dollars)  you would report this value as $100,000 and not $0.1M).

Answer

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Net cashflow = bond par value x (copuon rate – ( fixed rate))/2

=19000000*(10.6%-(7.5%-6.3%))/2

$893,000