A bank currently holds a loan with a principal of $12 million. The loan generates quarterly interest payments at a rate of LIBOR plus 300 basis points, with the payments made on the 15th of February, May, August, and November on the basis of the actual day count divided by 360.
The bank has begun to believe that interest rates will fall. It would like to use a swap to synthetically alter the payments on the loan it holds.
The rate it could obtain on a plain vanilla swap is 7.25 percent. Explain how the bank would use a swap to achieve this objective.