Question

(Floating-rate loans) The Bensington Glass Company entered into a loan agreement with the firm's bank to finance the firm's working capital. The loan called for a floating rate that was 27 basis points(0.27percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.23 percent and a minimum of 1.75 percent. Calculate the rate of interest for weeks 2 through 10.

Date	LIBOR
Week 1	1.92 %
Week 2	1.66 %
Week 3	1.52 %
Week 4	1.31 %
Week 5	1.58 %
Week 6	1.69 %
Week 7	1.72 %
Week 8	1.94 %
Week 9	1.93 %

Answer 1

Maximum rate given in question is 2.23% (ceiling), Minimum rate given in question is 1.75% (floor)

Week 2 Rate = Week 1 Rate + 0.27% = 1.92% + 0.27% = 2.19%

Week 3 Rate = Week 2 Rate + 0.27% = 1.66% + 0.27% = 1.93%

Week 4 Rate = Week 3 Rate + 0.27% = 1.52% + 0.27% = 1.79%

Week 5 Rate = Week 4 Rate + 0.27% = 1.31% + 0.27% = 1.58%. This is lower than floor. SO rate should be 1.75%.

Week 6 Rate = Week 5 Rate + 0.27% = 1.58% + 0.27% = 1.85%

Week 7 Rate = Week 6 Rate + 0.27% = 1.69% + 0.27% = 1.96%

Week 8 Rate = Week 7 Rate + 0.27% = 1.72% + 0.27% = 1.99%

Week 9 Rate = Week 18Rate + 0.27% = 1.94% + 0.27% = 2.21%

Week 10 Rate = Week 9 Rate + 0.27% = 1.93% + 0.27% = 2.20%