Lizard National Bank Purchases a Three-Year Interest Rate Cap for a Fee

Lizard National 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 theindex 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 total payments received (or paid) by Lizard, including the initial fee, are $____.

A) 500,000
B) -500,000
C) -1,500,000
D) 1,500,000
E) none of the above

Correct Answer:

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