I can across this question but I’m unsure of the answer.
A corporation has issued $5 million of floating rate bonds on which it pays an interest rate 1% over the Libor rate. The bonds are selling at par value. The firm is worried that rates might rise, and it would like to lock in a fixed interest rate on its borrowings. The firm sees that dealers in the swap market are offering swaps of Libor for 4%. What swap arrangement will convert the firm’s borrowings to a synthetic fixed-rate loan? What interest rate will be paid?
The answer said; " the firm should enter a swap in which it pays a 4% fixed rate and receives Libor on $5 million of notional principal. It’s total payments are as follows;
interest payments on bond: (Libor + 1%) x 5 million
net cash flow from swap: (4% - Libor) x 5 million
total: 5% x 5 million
Why is the net cash flow not (Libor-4%) ? Aren’t you receiving Libor, so then why would it be negative?