A Five-Year Cap Is Reset Annually Period

Multiple Choice

A five-year cap is reset annually period. The cap rate is 3% and the notional principal is $100 million. The 12-month LIBOR interest rate for the third year proves to be 5%. Which of the following is approximately true?

A) The resulting payoff is $2 million at the beginning of the third year
B) The resulting payoff is $2 million at the end of the fifth year
C) The resulting payoff is $2 million at the end of the third year
D) The resulting payoff is $2 million half way through the third year