Suppose that for the next five years party X agrees to pay party Y 10% per year, while party Y agrees to pay party X six-month LIBOR (London Interbank Offered Rate), which is 7.5%.. Party X is a fixed-rate payer / floating-rate receiver, while party Y is a floating-rate payer / fixed-rate receiver. Assume that the notional principal amount is $100 million, and that payments are exchanged every six months for the next five years. What will party Y pay party X every six month?

Question

Quizplus · Accepted Answer

Party Y pays party X based on the six-month LIBOR rate of 7.5% per annum. For a six-month period, this is 3.75% (half of 7.5%). Therefore, the payment is 3.75% of $100 million, which equals $3,750,000.

Suppose That for the Next Five Years Party X Agrees