A bank today makes $100 in 3-year loans with a 10% fixed annual interest rate. It funds the loans today with $100 in 1-year CDs that currently have a 3% annual interest rate. It has the option of entering an interest rate swap contract. The contract includes a variable rate of 2% and a fixed rate of 4%. If the bank chooses to hedge its interest rate risk using a $100 notional value swap contract, what is the bank's expected net interest income in the first year if all interest rates remain the same throughout the year?
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