The investment fund of Lemon County of California is investing $1 billion in a leveraged-bond hedge fund. This hedge fund has the following structure:
$\bullet$ $4 billion invested in a reverse-floater (also called bull FRN). This is a five-year bond with a coupon set at: 9% minus three-month LIBOR.
$\bullet$$3 billion borrowed at: three-month LIBOR.
The current yield curve is flat at 4.5%. The reverse floater is currently priced at 100%.
a. Estimate the yield-enhancement over LIBOR that the hedge fund would provide if the yield curve drops uniformly by 10 basis points (0.1%).
Actually, the whole yield curved moved up to 7% within a few days.
b. What would be the new income (coupon rate) on this $1 billion investment made by Lemon County?
c. Can you provide some rough estimate of the new market value of this $1 billion investment?

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The Answer of The investment fund of Lemon County of California is investing $1 billion in a leveraged-bond hedge fund. This hedge fund has the following structure:
$\bullet$ $4 billion invested in a reverse-floater (also called bull FRN). This is a five-year bond with a coupon set at: 9% minus three-month LIBOR.
$\bullet$$3 billion borrowed at: three-month LIBOR.
The current yield curve is flat at 4.5%. The reverse floater is currently priced at 100%.
a. Estimate the yield-enhancement over LIBOR that the hedge fund would provide if the yield curve drops uniformly by 10 basis points (0.1%).
Actually, the whole yield curved moved up to 7% within a few days.
b. What would be the new income (coupon rate) on this $1 billion investment made by Lemon County?
c. Can you provide some rough estimate of the new market value of this $1 billion investment?

The Investment Fund of Lemon County of California Is Investing ∙\bullet∙

The Investment Fund of Lemon County of California Is Investing $\bullet$