Lee Ltd and Ng Corporation negotiate a $15 million, 7-year interest-rate swap in which Lee will pay a 4.25% fixed rate to Ng, and Ng will pay Libor to Lee (there is no swap dealer involved). The firms will net payments half-yearly. Lee generally pays Libor plus 20 basis points for borrowing, and Ng borrows at 4.10%.

Determine the all-in-cost for Lee and Ng. It may be useful to create a diagram showing the payment responsibilities of each firm.

Suppose that after three years, the market offers a swap rate of 3.35% against Libor. A swap dealer offers to take the swap off Lees hands. How much will Lee have to pay the dealer? Explain why interest only is paid or why interest and principal are paid.