I am having troubles with coming up with the solution to this example. Could someone please tell me how to calculate IRS? If I calculated the spread as = LIBOR + (7% - IRS), would it be correct? Thank you!

Example: A company has issued a 10-year maturity bond denominated in USD with a floating interest rate 7% coupon paid semiannually. The company would prefer to pay rather the fixed interest rate on its debt. Propose a specific solution using an appropriate derivative contract. Estimate the spread over a reference rate if the 10 year risk free interest rate is currently at 5%.

If the company issued a floating rate bond and used LIBOR as its reference rate, then the coupon rate per annum would be

= LIBOR + s % where s = spread

Currently, LIBOR + s% must also equal 7% , the floating interest rate at which the company issued the bond.

If the 10-yr risk free interest rate = 5% => Floater has a Risk Premium = 7% - 5% = 2% relative to government bonds with the same maturity. Hence an estimate of the spread is 2%.

To pay a fixed interest rate instead of a floating rate, it would of enter an interest rate swap for the same notional value as the bondâ€™s par where it pays fixed and receives floating.