First South- Western agrees to buy a two- year, $25 million interest rate fl oor, settled once

Question:

First South- Western agrees to buy a two- year,

$25 million interest rate fl oor, settled once a year, from ITP Capital. The strike rate is 4 percent.

The premium is 2.5 percent of the principal amount. The interest rate 1 year from now is 5 percent and 2 years from now is 3 percent. How much will First South- Western pay for this contract?

How much will First South- Western receive from ITP Capital in years 1 and 2?

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