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What is the expected interest income from the loan each year

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A banker commits to a two-year $5,000,000 commercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such loans. To hedge against rates falling, the banker buys a 30-day interest-rate floor with a floor rate of 7.5% on a notional amount of $10,000,000. After 30 days, actual rates fall to 7.2%.

What is the expected interest income from the loan each year? How much did the option pay?

Reference no: EM131129425

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