Question

Petrol? Ibérico, a European gas? company, is borrowing $800,000,000via a syndicated eurocredit for six years at 90 basis points over LIBOR. LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight leading investment? bankers, which will charge? up-front fees totaling 1.6?% of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 4.10?% during the first six months and 4.30?% during the second six months.

Answer 1

Answer )

Given data in question as below,

Loan Amount	$800,000,000
Interest rate	Libor + 0.90
upfront fee	1.60%
First six month LIBOR rate	4.10%
Next six month LIBOR rate	4.30%

Effective interest rate =[ (1+r) ^1/n] - 1

where , r = interest rate charged , n = time in year

Calculation below,

		Interest charged	Formula
Loan Amount	$800,000,000
Interest rate	Libor + 0.90
Upfront fee	1.60%	$12,800,000.00	Loan * Upfront interest rate
First six month Interest rate	5.00%	$20,000,000.00	Loan *First six month Interest rate * time
Next six month Interest rate	5.20%	$20,800,000.00	Loan *next six month Interest rate * time
	Total Interest paid	$53,600,000.00
	Percentage of interest paid	6.70%	Total interest paid/ loan amount

Effective interest rate for 1 year ,

E.r = ( 1+ 6.7% ) ^ 1 - 1 = 6.70%