Question
A company enters into a total return swap where it receives the return on a corporate bond paying a coupon of $5 \%$ and pays LIBOR. Explain the difference between this and a regular swap where $5 \%$ is exchanged for LIBOR.
Step 1
In this case, one party agrees to pay a fixed rate of $5\%$ (the coupon rate on the corporate bond) and receive LIBOR (the floating rate). The other party agrees to pay LIBOR and receive the fixed rate of $5\%$. Show more…
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