An investor owns a $10 million par value of a 7.85%, 5-year bond of a BBB rated corporation, purchased at par value. The coupon payments are semiannual. At the same time, the investor enters into a 5-year interest-rate swap with a dealer, where the investor pays a fixed rate and receives 6-month LIBOR. Assume the fixed swap rate is 7.00%.

(a) What is the net payment received by the investor every six months, assuming the issuer does not default and there is no change in the 6-month LIBOR?

(b) If the swap rate in the market changes to 7.30% instead of 7.00%, and the investor sells the bond to the dealer at par value entering an asset swap agreement to pay semiannually at 7.30% and receive 6-month LIBOR plus 30 basis points, what would be the net payment received by the investor every six months?

Answer rating: 100% (QA)

a To calculate the net payment received by the investor every six months The bond has a par value of ... View the full answer