Swaps

CFA Level III Derivatives
#1

Concept Checkers on page 248 of book 4. I’m not understanding why the answer is choice C below. Why is LIBOR positive when the firm will be paying LIBOR?

  1. A firm issues fixed-rate bonds and simultaneously becomes a fixed-rate receiver counterparty in a corresponding plain vanilla interest rate swap. Which of the following best describes the subsequent, effective periodic interest payments of the firm? (SFR = swap fixed rate) A. SFR- [LIBOR- (fixed rate on debt)]. B. LIBOR- [(fixed rate on debt) - SFR]. C. LIBOR- [SFR- (fixed rate on debt)].
#2

draw a diagram

it becomes clear

Firm -> Fixed Rate on debt

Firm

-> Pays LIBOR

So Net pay = LIBOR + Fixed Rate on Debt - SFR or LIBOR - (SFR-Fixed Rate on Debt)

#3

Firm pays:

LIBOR + Fixed Rate of Debt

Firm recieves:

SFR

Total of what firm pays:

LIBOR + Fixed Rate on Debt - SFR = LIBOR- [SFR- (fixed rate on debt)]

#4

i see. i misinterpreted the question. I see that it’s asking for the amount paid and not the net profit. it’s little words that trip me up. thanks!