A corporate treasurer sells $10 non-callable 5-year bonds. He sees an attractive 5-year Libor floater at...

A corporate treasurer sells $10 non-callable 5-year bonds. He sees an attractive 5-year Libor floater at L+25. The 5-year swap curve is TSY 5-year plus 20 bps. The treasurer executes an interest rate swap. What does he do? What is his position after the swap?

What is the 'asset' that the manager ends up with?

Expert Solution

Trearsurer sells $10 non callable 5 years bonds.Non callable bond is a bond that is paid out at maturity. Issuer of non callable bond faces interest rate risk as even though interest rates decline, issuer is liable to pay interest rate fixed at the time of issuance.

To compensate the interest rate risk, treasurer executes pay floating interest rate swap where he will receive fixed interest rate and will pay floating interest at L+25.In case of decline in interest rate , treasurer will be benfited by receiving higher fixed interest and paying lower interest rate.Floating rates changes with change in the interest rate.

Position after the swap - Trearsurer is paying fixed interest rate on non callable bond, Receiving fixed interest on interest rate swap and paying floating rate on interest rate swap. So, nullifying paying fixed and receiving fixed interest rates against each other, Position remains as "Paying floating interest rate".

Asset that manager ends up with is LIBOR Floater.Non Callable Bond and Fixed interest Rate swap get set off with each other.

jeff jeffy answered 1 year ago

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A corporate treasurer sells $10 non-callable 5-year bonds. He sees an attractive 5-year Libor floater at...

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