24.4 The manager should enter a swap to pay a 5% fixed rate and receive LIBOR on notional prin- cipal of $100 million. The cash flows will then rise in tandem with the LIBOR rate:

The diagram describing the cash flows of each party to the swap is as follows:

Transcribed Image Text:

Interest received on fixed-rate bonds (= .05 x $100 million) + Cash flow on swap [= (LIBOR -.05) X notional principal of $100 million] Total payment 4.5% LIBOR Rate 5.0% $5,000,000 $5,000,000 5.5% $5,000,000 - 500,000 0 +500,000 $4,500,000 $5,000,000 $5,500,000