Answer: $500,000
Explanation:
An Interest Rate Cap is a Derivative Financial Instrument that works by paying the buyer for every year that the interest rate ceiling is exceeded.
Using the scenario above this is how it's works,
There is an Interest Rate Ceiling of 11%.
Any year that index which is this case is the London Interbank Official Rate (LIBOR) exceeds the 11%, the seller will pay the buyer the difference between the LIBOR and the Interest Rate Ceiling.
The Notional Principal is the amount on which the interest is based.
That means that in Year 1 with a LIBOR of 9 percent, the seller does not pay.
Second year LIBOR is 12 percent, the seller will pay 1% (12% - 11%)
Third year LIBOR is 13 percent, the seller will pay 2% (13% - 11%)
Lizard National Bank had to pay 2% of the notional Principal as a fee.
The amount that Lizard Receives from the seller is therefore,
= Total Received - Fees
= (1% + 2% - 2%) * 50,000,000
= 1% * 50,000,000
= $500,000
The total payments received by Lizard, including the initial fee, are $500,000.
