Suppose That for the Next Five Years Party X Agrees

question 26

Multiple Choice

Suppose that for the next five years party X agrees to pay party Y 10% per year, while party Y agrees to pay party X six-month LIBOR (London Interbank Offered Rate) , which is 7.5%.. Party X is a fixed-rate payer / floating-rate receiver, while party Y is a floating-rate payer / fixed-rate receiver. Assume that the notional principal amount is $100 million, and that payments are exchanged every six months for the next five years. What will party Y pay party X every six month?

• A) $3,750,000
• B) $4,250,000
• C) $4,750,000
• D) $5,000,000

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Definitions:

Long-Term Securities

Financial instruments or investments that are meant to be held or mature over a period longer than one year.

Capital Markets

Markets where individuals and institutions trade financial securities, including stocks and bonds, over long periods.

Maturities

The specific dates on which the principal or nominal amounts of financial instruments like bonds or loans are due to be paid to holders.

Short-Term Securities

Financial instruments, such as Treasury bills or commercial paper, that have maturities of one year or less.