Johnson Ltd.enters into a 3-year, $2.0 million plain vanilla interest rate swap and agrees to pay a fixed rate of 4.0% and receive LIBOR.Payments are completed every six-month based on the LIBOR at the beginning of each six month period.LIBOR had the following values for each six-month period:
$\bullet$Period 1 = 4.50%
$\bullet$Period 2 = 5.0%
$\bullet$Period 3 = 4.25%
$\bullet$Period 4 = 4.0%
$\bullet$Period 5 = 4.25%
$\bullet$Period 6 = 4.55%
Based on this information what is the amount of the third payment?

Question

Quizplus · Accepted Answer

The third payment is based on the LIBOR at the beginning of the third six-month period, which is 4.25%. The fixed rate is 4.0%. The notional amount is $2.0 million. The payment is calculated as follows:Payment = (LIBOR - Fixed Rate) * Notional Amount * TimePayment = (4.25% - 4.0%) * $2.0 million * 6 months / 12 monthsPayment = $2,500

Johnson Ltd ∙\bullet∙ Period 1 = 4 ∙\bullet∙ Period 2 = 5 ∙\bullet∙

Johnson Ltd $\bullet$ Period 1 = 4 $\bullet$ Period 2 = 5 $\bullet$