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Wabash Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate
Wabash Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The dollar amount received (or paid) by the seller of the interest rate cap over the three-year period is $____.
a. -500,000
b. 500,000
c. -1,500,000
d. 1,500,000
e. none of the above
answer is a please explain how.
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