Determine cash flow as a percent of the notional principal

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You are a pension fund manager who anticipates having to pay out 8 percent (paid semi-annually) on \$100 million for the next seven years. You currently hold \$100 million of a floating-rate note that pays LIBOR þ 2 1/2 percent.

You view this as an attractive investment but realize that if LIBOR falls below 5 1/2 percent, you will not have enough cash to make your fixed payments.

You arrange a swap with a dealer who agrees to pay you 6 percent fixed, while you pay it LIBOR.

Determine your cash flow as a percent of the notional principal at each payment date under this arrangement. Assume for simplicity that each period is 180 days and that there are 360 days in the year.

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