In case of a loan, The bank offers you the following conditions:

NP of the loan: 4,000,000 EUR

R(fix) = 3%

R(var) = 1-year Euribor + 2%

to be paid back in constant yearly payment during the next 5 years.

The 1-year Euribor today is -0.48. That means that, if we take it variable, the interest rate today would be 1.52%, and thats the interest rate that would be used to calculate the first payment (to be done at the end of the first year).

In case of taking the variable interest rate, the bank offers a Cap contract with a maximum rate of 4%, and an extra cost of +0.5%. Since you expect the Euribor to rise, you get that Cap contract.

The evolution of the Libor in the next years will be: today: -0.48%

In 1 year: 0.30%

In 2 years: 1.10%

In 3 years: 2.00%

In 4 years: 2.80%

Question 1: Draw the line graph that relates the index of reference (the Euribor) in the X-axis and the interest rate of that loan in the Y-axis, before and after accepting the Cap contract.

Question 2: If we finally decide to take the fix interest rate option (with a constant 3%), build the repayment table of that loan, and a cash-management table to see the periodical level of incomes (payments received by the customer) and outcomes (payments to the bank because of the loan).