Swaps & Structured notes
In the section on using swaps to hedge structured notes the CFA text talks about a leveraged floater.
it says that you buy a corporate bond with face value of leverage x face of the structured note, but then goes on to say:
On the other hand, KAT put up no capital to engage in this transaction. The cost of the American Factories bond was financed by issuing the structured note. (Institute 366)
Institute, CFA. 2019 CFA Program Curriculum Level III Volume 5. CFA Institute, 5/2018. VitalBook file.
So I have 2 questions: is principal (face amount) paid at the end of a structured note, or is it just the “interest” cash flows with a notional amount?
how does the sale of the note cover the capital outflow of buying the bond? Say on a 50m structured note paying 2xLIBOR, you have to buy a 100m bond (presumably at close to par) but the inflow from the note sale will not be anywhere near 100m.
what am I missing?? Thanks!
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