Leveraged Floater (Help please)

[gustobub2]

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%. The net semi-annual cash flow is closest to what?
The answer uses this equation: multiplier X Vfloater X (Cbond-Swap fixed rate)
I’ve never seen this equation before. What about the other side of the swap? Not even a mention of that. I really do not understand this question at all. Please help.

 

[GetSetGo]

Floater is a floating rate loan. Leveraged floater is a loan taht behaves like leveraged floating rate. The leveraged floating rate is 1.2 times LIBOR
You Pay 1.2 times LIBOR = 1.2 * LIBOR
You Get from the hedge you purchased
6% from Fixed rate note
LIBOR (from swap)
You pay to the hedged Swap:
4.4 %
Effective cashflows for you assuming principals are the same ….
Pay
1.2 LIBOR - 1 LIBOR = .2 LIBOR
Recieve 6% - 4% = 2 %
Hope it helps.

 

[Big Babbu]

GetSetGo Wrote:
——————————————————-
> Floater is a floating rate loan. Leveraged floater
> is a loan taht behaves like leveraged floating
> rate. The leveraged floating rate is 1.2 times
> LIBOR
>
> You Pay 1.2 times LIBOR = 1.2 * LIBOR
>
> You Get from the hedge you purchased
> 6% from Fixed rate note
> LIBOR (from swap)
> You pay to the hedged Swap:
>
> 4.4 %
>
> Effective cashflows for you assuming principals
> are the same ….
> Pay
> 1.2 LIBOR - 1 LIBOR = .2 LIBOR
> Recieve 6% - 4.4% = 1.6 % (just fixing this typo, other than that good explanation)
>
> Hope it helps.

 

[jbaldyga]

is this fair game for the test? I saw it in Schweser but not the curriculum.

 

[wvhome]

jbaldyga Wrote:
——————————————————-
> is this fair game for the test? I saw it in
> Schweser but not the curriculum.
i was thinking the opposite. in curriculum, not in schweser, not in LOS……. and i thought the EOC question was strange if not wrong, when they paid 3 times LIBOR and then they leveraged the swap too. i think they set the payout on the note too high.

 

[wvhome]

i was thinking this ALTHOUGH I DO NOT SEE IT IN LOS AT ALL.
up pay 1.2xLIBOR
u invest in 6% bond
u enter into 1.2X swap or swap on 1.2X amount of bond
1,2xLIBOR comes in
1.2x 4.4% = 5.28% out……..
so ARB PROFIT = 72 bps???
example in EOC was 3x LIBOR. pretty much thought that wouldn’t work. but then they used 3X the principal for the leveraged floater. how’s that leveraged??