Bank XYZ enters into a five-year swap contract with ABC Co. to pay LIBOR in return for a fixed 8% rate on a principal of $100 million. Two years from now, the market rate on three-year swaps at LIBOR is 7%. At this time ABC Co. declares bankruptcy and defaults on its swap obligation. Assume that the net payment is made only at the end of each year for the swap contract period. What is the market value of the loss incurred by Bank XYZ as a result of the default?

1. $1.927 million

2. $2.245 million

3. $2.624 million

4. $3.011 million

Bank XYZ enters into a five-year swap contract with ABC Co. to pay LIBOR in return for a fixed 8% rate on a principal of $100 million. Two years from now, the market rate on three-year swaps at LIBOR is 7%. At this time ABC Co. declares bankruptcy and defaults on its swap obligation. Assume that the net payment is made only at the end of each year for the swap contract period. What is the market value of the loss incurred by Bank XYZ as a result of the default?

1. $1.927 million

2. $2.245 million

3. $2.624 million

4. $3.011 million

Please do not copy from Chegg otherwise I have to report the answer. Explain the answer thoroughly by showing each step of the calculation.