21. Acme Insurance Company has purchased a five-year bond whose interest rate floats with the LIBOR. Specifically, in a given year, the interest rate is equal to the LIBOR plus 200 bps. At the same time the insurance company purchases this bond, it enters into a floor agreement with Goldman Sachs in which the notional principal amount is $35 million with a strike rate of 6%. The premium Acme Insurance Company agrees to pay Goldman Sachs each year is $300,000.

a. Suppose that when it is necessary to determine whether a payment must be made by Goldman Sachs, the LIBOR is 9%. How much must Goldman Sachs pay Acme Insurance Company?

b. Suppose that when it is necessary to determine whether a payment must be made by Goldman Sachs, the LIBOR is 3%. How much must Goldman Sachs pay Acme Insurance Company?

c. What is the minimum interest rate that Acme Insurance Company has locked in each year for the next five years by entering into this floor agreement and buying the five-year bond, ignoring the premium that Acme Insurance Company must make each year?