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On January 1, 2016 Thrifty Craft (a NYSE company) borrowed $100 million from Lyft Bank on a five year note, with interest due annually and the principal due on December 31, 2020. The rate of interest on the borrowing was USD LIBOR + 800 basis points (bps). The principal is due on December 31, 2020. Immediately after borrowing $100 million, Thrifty Craft entered into an interest swap on 1/1/2016 for a notional amount of $100 million with a maturity date of December 31, 2020 and the annual net settlement occurring on the same day when the interest on the bank debt is due. The pay leg for the borrowing is 10% and the receive leg is LIBOR + 800 basis points. Assume that the fair value of the swap as of 1/1/2016 is zero.
The LIBOR as of January 1, 2016 was 1.5%, which will be used to determine the interest payment on the borrowing and the net settlement on the swap contract on 12/31/2016. The LIBOR increased to 2.0% as of December 31, 2016.
What is the net settlement on the interest rate swap agreement on 12/31/2016?
A. Payment of $500,000
B. Receipt of $500,000
C. Zero
D. Payment of $10 million
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