The six month LIBOR rate for a reference period is 6.8% (annualized).The fixed six-month coupon rate for the same period is 3.9%.Compute the payment to the floating-rate payer if the notional principal is $100 million.
A)$0.5 million
B)$1 million
C)$1.5 million
D)$2 million
E)$2.5 million

Question

Quizplus · Accepted Answer

The floating-rate payer pays the difference between the LIBOR rate and the fixed coupon rate, multiplied by the notional principal and the fraction of a year. In this case, the difference is 6.8% - 3.9% = 2.9%, the notional principal is $100 million, and the fraction of a year is 6 months / 12 months = 0.5. Therefore, the payment to the floating-rate payer is 2.9% * $100 million * 0.5 = $1.45 million.

The Six Month LIBOR Rate for a Reference Period Is