Question

Q4: The Slinger Metal Fabricating Company entered into a loan agreement with its bank to finance the firm’s working capital. The loan called for a floating rate that was 30 basis points over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week within the bounds of a maximum annual rate of 2.55% and a minimum of 1.95%.

Week(t)	LIBOR (t) %	LIBOR (t-1)+Spread	Loan rate
1	2.3
2	2.25	?	?
3	1.66	?	?
4	1.58	?	?
5	1.35	?	?
6	1.63	?	?
7	1.88	?	?
8	1.78	?	?
9	1.93	?	?
10	1.66	?	?

Required:

1. Calculate the LIBOR (t-1) +Spread and Loan rate for the weeks 2 through 10.
2. Is the ceiling rate or floor rate violated during the loan period?
3. To finance its long term investment, the Slinger Metal Fabricating Company has also issued a 12% bond that is to mature in nine years. The bond had a $1,000 par value, and interest is due to be paid annually. If the yield to maturity 10%, estimate the price of this bond

Answer 1

1).

LIBOR(t-) + spread = LIBOR of last week + 0.3%

The loan rate has to be between the floor and ceiling rates. If it exceeds any of these two limits, then loan rate will be capped at either the ceiling or the floor. The grey cells in 'Loan rate" column are the cells where the ceiling or floor rate was being violated and the caps kicked in.

2). FV (par value) = 1,000; PMT (annual coupon) = coupon rate*par value = 12%*1,000 = 120; N (number of coupons to be paid) = 9; rate (annual YTM) = 10%, solve for PV.

Bond price = 1,115.18