Question

Petrol​ Ibérico, a European gas​ company, is borrowing $650,000,000 via a syndicated eurocredit for six years at 120 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 1.5​% of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 3.80​% during the first six months and 4.10​% during the second six months.

Answer 1

	First 6 months	Second 6 months
Loan amount	650,000,000	650,000,000
LIBOR	3.80%	4.10%
Rate applicable	(3.80%+1.20%)/2	(4.10%+1.20%)/2
Rate applicable	2.50%	2.65%
Interest paid	16,250,000.00	17,225,000.00
Total Interest paid	33,475,000.00
Loan amount net of upfront fee	650000000*(1-1.5%)
Loan amount net of upfront fee	640,250,000
Effective annual rate	33475000/640250000
Effective annual rate	5.23%