Cushion spread is the difference between current rates of return and the minimum required rate of return:

The current value of the coupon bond position is:

INPUTS: N= 20, I/Y = 6.5%/2 = 3.25%, PMT = 7.6%/2 = 3.8% of $2.8 million = $106,400, FV = 2,800,000,  CPT PV → PV = -3,023,906 (ignore minus sign)

The minimum required return based upon the required terminal coupon-bond position value of $3.6 million and its present value is (3,023,906)(1+X)⁸ = 3,600,000.  Solving for X we then have:

(1+X)⁸ = 3,600,000 / 3,023,906

(1+X)⁸ = 1.1905

1+X = 1.1905^.125

1+X = 1.02204

X = .02204

I = 2.204% X 2 = 4.41%

Cushion spread = 6.50 - 4.41 = 2.09%