Question

Question text

Alphaget Inc., borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a three-month rollover basis from a London bank. If three-month LIBOR is 4 ½ percent over the first three-month interval and 5 3/8 percent over the second three-month interval, how much will Alphaget pay in interest over the first year of its Eurodollar loan?

Select one:

a. $46,406

b. $43,057

c. $47,658

d. $49,432

Answer 1

Ans :

Loan Amount = $1,500,000

Lending Margin = 1.25% per annum

a) Computation of Interest over First three-month interval

LIBOR = 4.5%

Interest Rate = LIBOR + Lending Margin
= 4.5% + 1.25 %
= 5.75% per annum

Interest Cost = Loan Amount * Interest Rate * 3/12
= $1,500,000 * 5.75% * 3/12
= $21,562.50

b) Computation of Interest over Second three-month interval

LIBOR = 5 3/8% = 5.375 %
Interest Rate = LIBOR + Lending Margin
= 5.375% + 1.25 %
= 6.625 % per annum

Interest Cost = Loan Amount * Interest Rate * 3/12
= $1,500,000 * 6.625% * 3/12
= $24843.75

Total Interest = $21,562.50 + $24,843.75 = $46406.25 =~$46,046

Ans : Alphaget will pay interest of $46,046 i.e. Option (a) is correct