8. A financial institution has entered into an interest rate swap with company X. Under the

terms of the swap, it receives 10% per annum and pays six-month LIBOR on a principal of $10

million for five years. Payments are made every six months. Suppose that company X defaults

on the sixth payment date (end of year 3) when the interest rate (with semiannual compounding)

is 8% per annum for all maturities. What is the loss to the financial institution? Assume that six-month LIBOR was 9% per annum halfway through year 3.