Compute the synthetic spread over LIBOR for a 5-year, 7.5% fixed-rate coupon par bond given the following swap and rate information. Swap: LIBOR flat vs. fixed of +75 bp to the 5-year Treasury yield 5-year Treasury yield: 6.30% In the above question, how would I know whether the bond holder is receiving or giving LIBOR?

he holds a bond with fixed coupon = he receives fixed (right now) So, in the world of cfa problems, you do exactly the opposite with the swap = pay fixed. Imagine: If you already receive a fixed coupon (from the bond you hold), it makes no sense to do a swap to receive another fixed coupon and paying LIBOR (as you donĀ“t receive LIBOR from anywhere, so you would have the risk of LIBOR going up above the fixed coupons you get). fixed = tyield + 75 bps = 6.30% + 0.75% = 7.05% So: a) he receives 7.5% fixed from his bond b) he pays 7.05% fixed in the swap c) he receives LIBOR in the swap So a - b + c = 0.45% + LIBOR Synthetic spread = 45 bps

ok. thanks!