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A commercial bank estimates that its fixed rate assets are earning an average interest income of 10%, while its variable rate liabilities are forecast to
A commercial bank estimates that its fixed rate assets are earning an average interest income of 10%, while its variable rate liabilities are forecast to pay the interest rates below: End of Year 0 1 2 3 4 5 LIBOR 7% 8% 12% 13% 11% Interest Rate Ceiling 10% 10% 10% 10% 10% Suppose it sets up an interest rate ceiling arrangement with another financial institution at 10%. Assuming a notional amount of $50,000,000 and using the LIBOR forecast for each year to discount back the payments incurred, what would be the present value of these payments?
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