Determine cash flow as a percent of the notional principal

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Reference no: EM131323439

You are a pension fund manager who anticipates having to pay out 8 percent (paid semi-annually) on $100 million for the next seven years. You currently hold $100 million of a floating-rate note that pays LIBOR þ 2 1/2 percent. You view this as an attractive investment but realize that if LIBOR falls below 5 1/2 percent, you will not have enough cash to make your fixed payments.

You arrange a swap with a dealer who agrees to pay you 6 percent fixed, while you pay it LIBOR.

Determine your cash flow as a percent of the notional principal at each payment date under this arrangement. Assume for simplicity that each period is 180 days and that there are 360 days in the year.

Reference no: EM131323439

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