CC Question B-61 same as the question in BKM 23
"
Desert Trading Company has issued $100 million worth of long-term bonds at a fixed rate of
7%. The firm then enters into an interest rate swap where it pays LIBOR and receives a fixed
6% on notional principal of $100 million. What is the firm’s overall cost of funds? "
Could someone help me explain why the net cost is LIBOR +1 % to the firm?
My thinking is, the firm issuing at 7%, so it’s paying 7% which should be negative; then it would get - LIBOR + 6% from SWAP; so the net flow to the firm should be -7% - LIBOR + 6% = LIBOR -1%.
Feeling like I’m making a big concept mistake?!