both are required for present value and fees

Interest rate caps, floors, and collars 1. 2. 3. STEP: 3 of 3 Assume that the Bank of Topeka anticipates that interest rates will increase over the next several years and decides to hedge the interest rate risk on its portfolios by purchasing a three-year interest rate collar, which uses LIBOR as the index used to represent the prevailing interest rate. The interest rate cap specifies a fee of 3 percent of notional principal valued at $100 million with an interest rate ceiling of 8 percent. The interest rate floor specifies a fee of 3 percent of notional principal valued at $100 million and an interest rate floor of 7 percent. Given this information, fill in the table that follows. End of Year 3 0 1 2 9% 11% 5% 8% 8% 896 Information Purchase of Interest Rate Cap LIBOR Interest Rate Ceiling LIBOR's Percent above the Ceiling Payments Received Fee Paid 19 3% 0% $ $ 7% 79 79% Sale of Interest Rate Floor Interest Rate Floor LIBOR's Percent below the Floor Payments Made 2% 09 0% Fee Received Given the information filled out in the table, the Bank of Topeka's profit form the transaction after the three-year period is Grade Final Step TOTAL SCORE: 214