An investor has issued a $50 million callable floating-rate security with a 4-year maturity, and 3% cap. The coupon formula for the floater is 6-month LIBOR plus 150 basis points and the interest payments are made semiannually. At the time of purchase, 6-month LIBOR is 1.5%. The investor used the proceeds to invest in a putable 4-year corporate note with a fixed coupon rate of 3.5%.

1. Assuming the current LIBOR is 2%, calculate the investors net semiannual payments in dollars (net semiannual dollars received by fixed-rate receiver):

2. Assuming that LIBOR remains below 1.5%, after entering the swap contract, what annual income spread can the investor lock in in percentage is: