Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An

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Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%.

An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 7% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 7%.

What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $10 million.

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ISE Investments

ISBN: 9781260571158

12th International Edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

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