Buyer Limited design to sign an interest rate swap agreement to pay a floating rate and receive a fixed rate. The swap contract can help Buyer Limited to convert $100 million, 4.6% fixed interest rate bond into a floating rate payment. The floating rate is indexed to the six-month LIBOR minus 0.52%.
(a) Explain why Buyer Limited uses a swap agreement rather than issue a floating-rate bond?
(b) Determine the net cash flow to Buyer Limiter when the LIBOR is 5% at the interest payment settlement date.