Hi all!
volume 6, reading 29, section 2.3.1, page 362. Leveraged floating rate note.
there is an exibit explaining the structure, according to which comany issues laveraged floating rate note at notional FP paying 1,5Libor. Then company buys a bond with fixed rate and notional of 1,5FP. Then it enters into swap with notional of 1,5FP paing fix and receiving Libor. Effectively, it receives 1,5libor from swap dealer which it pays to the buyer of note (position is flat). Thus, net effect is the difference between what it receives under bond with fixed rate and what between fixed leg under the swap.
Further reading explains that One of advandages of such structure is that it requires no capital at intiation to establish position given that cost of bond is financed through sell of note.
question is: as I understood from this reading the notional of the note is FP, while bond’s face value is 1,5FP meaning that company needs to use 0,5FP of own funds, which contradicts to the advantage of “0 cost”. I realise that i am missing something. Will appriciate if you can help to understand