Interest rate swaps 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?
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?