GM borrowed a 3-years $50 million loan on 1st February 2017 from Citibank with a locked-in fixed annual interest rate of 1.5% (APR), paid semi-annually. The CFO of GM expects that interest rates will fall and decides to enter into a plain vanilla interest rate swap contract with Barclays Bank. According to the swap contract, which specifies semi-annual net cash adjustment that coincides with the loans interest payment, GM will pay at an annual rate of LIBOR + 20 bps and receive 1.5% fixed annual rate. The notional principal of the swap equals the amount of GMs debt. Assume that the loans interest payments are to be made on 1st August and 1st February of each years.

A) Explain the above situation with a diagram.

B)Calculate the net cash flow from the swap on each of the interest payment dates.

LIBOR rates to be used (chronologically starting with the recent most interest payment date):

1.345432

1.402012

1.326175

1.242948

1.293435

1.348693