Explanation:
You will receive a total of $30,000 for the first two years [$7,500,000 * (0.082 - 0.080) * 2]. The new floating rate afterward that you will receive is 8.2% - 1.5% = 6.7%. You will pay a total of $292,500 for the last three years [$7,500,000 * (0.067 - 0.08) * 3 years]. Thus, your net payment over the five years will be $262,500 ($30,000 - $292,500 = -$262,500).
Q-711: Assume that you are a swap dealer and have just acted as a counterparty in an interest rate swap. The notional principal for the swap was $7.5 million and you are now obligated to make five annual payments of 8 percent interest. The floating rate that you will receive is 8.2 percent, and the floating payments to you are annual as well. If the floating rate remains unchanged for the first two years and then falls by 1.5 percent for the remainder of the contract, what will be your net payments for the five years?
A
$62,000
B
$30,500
C
$203,500
D
$262,500
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