Explanation:
In an interest rate swap, the floating rate for a given period is set at the beginning of the period. The payment on August 9, 2022, covers the 6-month period starting on February 9, 2022.
The 6-month LIBOR on February 9, 2022, was 1.40%.
The floating rate paid by First Republic is LIBOR + 1.25% = 1.40% + 1.25% = 2.65%.
The fixed rate received by First Republic is 5.00%.
The net rate received is $5.00% - 2.65% = 2.35%\text{Notional} \times \text{Net Rate} \times 0.5 = 7,500,000 \times 0.0235 \times 0.5 = \text{USD } 88,125$.
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Q.3 First Republic entered into a 2-year interest rate swap on August 9, 2020, in which it received a 5.00% fixed rate premised on an agreement to pay LIBOR plus 1.25% on a notional amount of USD 7.5 million. Payments were to be made every 6 months. The table below displays the actual annual 6-month LIBOR rates over the 2-year period:
| Date | 6-month LIBOR |
|---|---|
| Aug 9, 2020 | 0.89% |
| Feb 9, 2021 | 1.20% |
| Aug 9, 2021 | 1.35% |
| Feb 9, 2022 | 1.40% |
| Aug 9, 2022 | 1.78% |
Assuming no default, how much did First Republic receive on August 9, 2022?
A
USD 73,875
B
USD 88,125
C
USD 99,200
D
USD 68,750
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