Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two. What will be the net swap cash flow each year if the notional value of a swap is $100 million?
A)The thrift pays $0.75 million to the bank in year one and receives $0.25 million from the bank in year two.
B)The thrift receives $0.75 million from the bank in year one and pays $0.25 million to the bank in year two.
C)The thrift pays $0.25 million to the bank in year one and receives $0.75 million from the bank in year two.
D)The thrift receives $0.25 million from the bank in year one and pays $0.75 million to the bank in year two.
E)None of the above.

Question

Quizplus · Accepted Answer

The thrift pays LIBOR on the notional value of the swap to the bank in year one and receives the fixed rate on the notional value of the swap from the bank in year two. In this case, the thrift pays 5.25 percent of $100 million, or $5.25 million, to the bank in year one and receives 6.25 percent of $100 million, or $6.25 million, from the bank in year two. The net swap cash flow is therefore $6.25 million - $5.25 million = $1 million in year two.

Assume That the Swap Is for Two Years and That