What is the payment made under the cap

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Reference no: EM132041847

Zion National Bank (ZNB) purchased a two-year $250 million (notional value) interest rate cap from a large investment banking firm. The cap has a 5.25% cap rate and annual payments are made based on the value of the reference rate (3- month LIBOR) on the last day of year one and year two.

a) If 3-month LIBOR is 5.75% on the last day of year one, what is the payment made under the cap? Who makes the payment to whom?

b) If 3-month LIBOR rises to 6.33% during year two of the cap contract but then declines to 4.95% on the last day of the second year, what is the payment made under the cap? Who makes the payment to whom?

Reference no: EM132041847

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