Question 5 A bank provides a capped mortgage of 200,000, for 20 years at a variable rate of the Libor + 4% (initially the Libor is 1.5%). The bank also provides variable rate Module Code: 5FNCE006W Page 3 of 5 mortgages (no caps) at a starting rate of 6%. The customer agrees to enter the cap arrangement in which the bank reimburses them if the floating rate rises above 6 percent. The cap agreement has a maturity of 5 years after which the client will pay the standard variable rate charged by the mortgage provider. Suppose that at the beginning of the second year the total variable rate is to 6.5 percent for a year, on year three it increases to 8 percent for the year and on year 4 and 5 the rate goes down to 5.5%. What rebates must be paid following the agreement in place? What are the actual interest rates paid by the client each of the first 5 years? Assume that the bank charges its client 4000 for the cap, does the client benefit from the cap overall? (25 marks) ( 600 words )