In Situation 4 JMI has issued a leveraged floater which is an outstanding bond liability in which they will have to pay 1.2 x LIBOR x value of the floater. To hedge the risk of interest rates increasing they have entered into a swap as the fixed rate payer and floating rate receiver using the LIBOR payments received in the swap to pay on the leveraged floater. Since the payment on the leveraged floater is 1.2 x LIBOR, the notional principal of the swap and the bond purchased would have to be 1.2 x value of the leveraged floater issued or 1.2 x 12,000,000. They are earning a positive spread on the swap by purchasing a bond that pays 6% in which they use that payment to pay the 4.4% fixed in the swap. The following is not required by the LOS but is for understanding purposes only. The net cash flow to JMI is:
Net cash flow = multiplier × VFloater × (CBond - Swap Fixed Rate)
Net cash flow = 1.2 × 12,000,000 × [(0.06 / 2) - (0.044 / 2)] = $115,200
