2. The Carlton fund has created the following issue of bonds to raise funds to invest in other securities

(assume the 10 year Treasury is 8.2% at issuance)

Tranche

Par Value (US $ millions)

Coupon Rate

Senior

120

Libor + 50 bps

Mezzanine

15

10 year Treasury Rate + 150bps

Subordinated

10

a. Why would Carlton desire to enter into an interest rate swap?

b Assume Carlton enters into an interest rate swap with a counterparty.

One side agrees to pay fixed 10 year Treasury + 220bps , the other to pay a variable rate of Libor + 10 bps

Compute the rate if possible

What would Carlton agree to pay the counterparty?

What would Carlton receive from the counterparty?