Southern Trust is planning to invest \(\$ 150\) million in a Commerce Bank two-year floating-rate note paying LIBOR plus 150 basis points. The floating-rate note has a maturity of two years, starts on December 20, and is reset the next seven quarters. The initial quarterly rate is equal to \(2.5 \% / 4\) and resets quarterly to equal to one fourth of the annual LIBOR on those dates plus 150 basis points: (LIBOR \% +1.5\%)/4. Commerce Bank is offering Southern Trust a floor with the following terms:

- Seven floorlets with expiration dates of 3/20, 6/20, and 9/20.

- The floor rate on each caplet is \(2.5 \%\).

- The time period for each caplet is 0.25 per year.

- The payoffs for each floorlet are at the interest payment dates on the FRN.

- The reference rate is the LIBOR.

- Notional principal is \(\$ 150\) million.

- The cost of the floor is \(\$ 200,000\).

TABLE 8.3

Complete Table 8.4, showing the Southern Trust's quarterly interest receipts, floorlet cash flows, hedged interest receipts (interest plus floorlet cash flow), and hedged and unhedged rate as a proportion of a \(\$ 150\) million investment (do not include floor cost) for each period given LIBOR rates starting at \(1 \%\) on \(3 / 1 / \mathrm{Y} 1\) and then increasing each period by \(50 \mathrm{bp}\).

TABLE 8.4

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on Payment +150bp) (0.25) Loan: Floating Rate Loan; Term = 2 years; Reset Dates: 3/1, 6/1, 9/1, 12/1; Time Frequency = 0.25; Rate = LIBOR + 150bp; Payment Date = 90 days after reset date Cap: Cost of Cap = $300,000; Cap Rate = 2.50%; Reference Rate = LIBOR; Time Frequency = 0.25; Caplets' Expiration: On loan reset dates, starting at 6/1/Y1; Payoff made 90 days after reset date 1 Reset 2 3 4 Assumed Loan Interest Cap Payoff on Payment Date LIBOR Date (LIBOR Date Max [LIBOR-0.025,0] (0.25) ($150m) 6 7 5 Hedged Hedged Rate Unhedged Interest 4[Col Rate Payment (5)/$150m] LIBOR + Col. (3)- Col. (4) 150bp ($150m) 3/1/Y 0.010 6/1/Y1 0.010 $937,500 So $937,500 0.0250 0.0250 9/1/Y1 0.015 $937,500 So $937,500 0.0250 0.0250 12/1/Y1 3/1/Y2 6/1/Y2 9/1/Y2 12/1/Y2 3/1/Y3