A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six-month LIBOR on a principal of $10 million for 5 years. Payments are made every six months. Suppose that the company X defaults on the eighth payment date (end of year 4), when the interest rate with semi-annual compounding is 4% per annum for all maturities. Assume that six-month LIBOR was 3.5% per annum halfway through year 4 (year 3.5).

What is the loss to the financial institution? (4 marks)