A 5-year floating-rate security was issued on January 1, 2006. The coupon rate formula was 1-year LIBOR + 300 bps with a cap of 10% and a floor of 5% and annual reset. The 1-year LIBOR rate on January 1st of each year of the security’s life is provided in the following table:
| Year | 1-Year LIBOR |
| 2006 | 3.5% |
| 2007 | 4.0% |
| 2008 | 3.0% |
| 2009 | 2.0% |
| 2010 | 1.5% |
During 2010, the payments owed by the issuer were based on a coupon rate closest to:
B is correct because LIBOR + 300 bps at the reset date equals 1.5% + 3.00% = 4.5%, which is below the floor of 5.00% so the coupon rate will be equal to the floor.