Assume a swap is written on a bond with a $100 million par value and a 5-year maturity. The swap premium is 100 bps annually. Which statement is true?

A. The protection buyer will pay the seller $1 million per year.
B. The protection buyer will pay the seller $200,000 per year.
C. The protection seller will pay the buyer $1 million per year.

Correct Answer: A

$100 million x 1% = $1 million. This is usually paid on a quarterly basis. If there is no credit event the swap will mature in 5 years.