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A bank agreed to an interest rate swap with a company. Under the terms of the swap, the bank pays 4.3% per annum (compounded semiannually)
A bank agreed to an interest rate swap with a company. Under the terms of the swap, the bank pays 4.3% per annum (compounded semiannually) every six months and receives six-month LIBOR in return, for 10 years on a notional principal of $200 million. Today, when the swap has a remaining life of 2.5 years, the company defaults on the swap and will not make the promised floating payment (the bank will not make a reciprocating payment either). The company will not make any other payments in the future. OIS rates are 3.6% for all maturities (with continuous compounding) and LIBOR rates are 4.9% for all maturities (with semiannual compounding). On the last payment date, the 6-month LIBOR forward rate was 4.3%. Part 1 Attempt 1/4 for 10 pts. What is the loss to the bank (in absolute terms, $ million)
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