Question
A firm with a rating BBB has issued bonds with a 6% fixed coupon and maturity of 3 years. An investor likes the coupon paid
A firm with a rating BBB has issued bonds with a 6% fixed coupon and maturity of 3 years. An investor likes the coupon paid by this firm but at the same time anticipates a rise in short-term rates. Therefore, the investor creates a synthetic bond by buying the 6% coupon bond with a maturity of 3 years and entering a swap where the investor receives 1-year Libor rate and pays the fixed 4%. How much coupon rate does the synthetic bond delivers?
A. The synthetic bond delivers a 1-year Libor +6%
B. The synthetic bond delivers a 1-year Libor -4%
C. The synthetic bond delivers a 1-year Libor -2%
D. The synthetic bond delivers a 1-year Libor +2%
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