Lizard National Bank purchases a three-year interest rate cap for a fee of 2 per

Question

Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. Assume that LIBOR is expected to be 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The dollar amount to be received (or paid) by the seller of the interest rate cap based on the forecast of LIBOR assumed above over the three-year period is $____. a. 500,000 b. 500,000 c. 1,500,000 d. 1,500,000 e. none of the above

Explanation / Answer

ANS:

Option B.) 500,000 is the answer.

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