Question

Part A. A year ago a bank entered into a $50 million five-year interest rate swap....

Part A. A year ago a bank entered into a $50 million five-year interest rate swap. It agreed to pay company A each year a fixed rate of 6% and to receive in return LIBOR. When the bank entered into this swap, LIBOR was 5%, but now interest rates have risen, so on a four-year interest rate swap the bank could expect to pay 6.5% and receive LIBOR.

(a) Is the swap showing a profit or loss to the bank? Explain.

(b) Suppose that at this point company A approaches the bank and asks to terminate the swap. If there are four annual payments still remaining, how much should the bank charge A to terminate?

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