Please Solve It

Question

XYZ Plc. borrows 20 Million Pounds of 6 months LIBOR+0.25% for a period of two years.

Mr. David, Treasury Manager of XYZ anticipates a rise in LIBOR, hence proposed to buy a Cap Option from a ABC Bank at strike rate of 7%.

The lump sum premium is 1% for the whole of the three resets period and the fixed rate of interest is 6% p.a. The actual position of LIBOR during the month coming reset period is as follows:                                   

                  Reset Period                                                            LIBOR

                       1                                                                               8.00%

                       2                                                                                8.50%

                      3                                                                                9.00%                                                                                                                                                  

This is question of May 2011 RTP Final New Course.

I am not able to understand the "Calculation of Premium Payable to bank " which is computed in the solution as follows :

                                    0.01

               = ------------------------------------------- x 20,000,000

                                                              1

                         (1/0.03)  -       ---------------------

                                                     0.03 x (1.03)4 ( i.e. 1.03 have its power 4)

Please interpret it.

Thanks in Advance!