dont look at the number of years for floorlets and caplets in this context… its only asking the payoff amount. date contact initiated assume 1st jan 2000 . then at end of year 2 (31st december 2002 or 1st January 2003) it turns out that the LIBOR is 5.8% (this would be the 1 year interest rate throughout 2003) instead of 6% (the option on the floor). so 6%-5.8% X notional principal is $60,000… but since its asking for the value of at the end of year 2002. Then we need to discount it by the LIBOR rate 1.058^1(by one period of the LIBOR rate used in 2003) which gives 56,111. hope this helps…