Exhibit 2 - 2.3.1 Reading 44 example If KAT issues leveraged note with principal FP that pays interest 1.5 Libor and KAT then invests proceeds to buy bond with 1.5 FP face value. so where does KAT get the balance 0.5 FP? what am I missing? Text book says " KAT put up no capital to engage in this transaction…" I don’t understand. Can anyone help? Thanks.
Discussed many times recently. Just go with the flow. Buy 1.5 FP notional value of bonds at 1.0 FP price . And don’t say its impossible. It is very possible , for a certain term , YTM , it is possible.
Thanks Janakisri for explaining, it makes sense now. BTW I never said ‘impossible’ anywhere.