Question

A borrower just paid a call premium of $100,000 today and received the right to cap...

A borrower just paid a call premium of $100,000 today and received the right to cap LIBOR at 5.0% on an upcoming 1-year loan 1 year from today. Assuming 1 year later, the LIBOR rate increases to 8% and the rate on the floating rate loan is set based on this LIBOR rate. The effective borrowing rate should be:

Notional Principal

$40,000,000
Floating rate applicable to an upcoming loan LIBOR + 2%
Time to option expiry/lending day 1 year
Loan term 1 year
Strike rate on interest rate option 5.0%
Cost (premium) of interest rate option $100,000
Current quote on LIBOR 5.5%
LIBOR on borrowing day 8%
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

1 year later, the LIBOR rate increases to 8% and the rate on the floating rate loan is set based on this LIBOR rate.

The borrower will exercise the right to cap LIBOR at 5.0% on an upcoming 1-year loan 1 year from today.

Floating rate applicable to an upcoming loan, I = LIBOR capped at 5.0% + 2% = 7%

Notional Principal, P = $40,000,000

Time period, T = 1 year

Hence, interest = P x I x T = $ 40,000,000 x 7% x 1 =  2,800,000

Call premium paid = $ 100,000

The effective borrowing rate should be = (Interest + Call premium) / Notional principal = (2,800,000 + 100,000) / 40,000,000 = 7.25%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. A borrower has secured a 30 year, $100,000 loan at 8%.  Fifteen years later, the borrower...
1. A borrower has secured a 30 year, $100,000 loan at 8%.  Fifteen years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 7%.  However, the up-front fees, which will be paid in cash, are $2,000.   What is the monthly payment on the initial loan?   What is the loan balance at the time of refinancing?   What is the return on investment if the borrower expects to remain in the home for the next fifteen years after refinancing?  ...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate is Euro €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 1% in the euro zone. Under the PPP, what is the one-year forward rate, €1 = $_________, that should prevail, round to 4 decimal places? Yesterday, you entered into a futures contract to buy Euro 62,500 at $1.5500 per Euro. Your...
1. Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic...
1. Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won950/$, and the 6-month forward rate is Won975/$. The six-month Korean won interest rate is 8% per annum, the six-month US dollar rate is 6% per annum. Bobcat can invest at...
Scenario 2: Considering the calculations you have done so far, you need to attend to a...
Scenario 2: Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia...
You are the manager of a U.S. company situated in Los Angeles and manages the import/export...
You are the manager of a U.S. company situated in Los Angeles and manages the import/export division of the company. The company distributes (resells) a variety of consumer products imported to the U.S.A from Europe and also exports goods manufactured in the U.S.A. to Canada. Therefore, your company is very much dependent on the impact of current and future exchange rates on the performance of the company. Scenario 1: You have to estimate the expected exchange rates between your home...
Quiz Please show workings for each question. 1. Hermes Inc. received on January 1, 2017, a...
Quiz Please show workings for each question. 1. Hermes Inc. received on January 1, 2017, a $22,800 4-year zero-interest bearing note for lending $16,400 to Phoenix Co. Hermes financial year ends December 31. Round to the nearest whole number. The discount rate on the note is: 2. Rudder Inc. accepts on April 1, 20x8 a 120-day 12% note for $8,000 worth of accounts receivable past due. Calculate the amount of cash Rudder should collect on the note at maturity. Round...
Assume you have just been hired as a Finance Manager of Anjung Puteri. The company’s earnings...
Assume you have just been hired as a Finance Manager of Anjung Puteri. The company’s earnings before interest and taxes (EBIT) was RM500,000 last year and is expected to remain constant over time. Since no expansion capital will be required, Anjung Puteri plans to pay out all earnings as dividends. The management group owns fifty percent (50%) of the stock and the rest is traded in the over-the-counter market. In your finance course, you learned that most firm owners would...
COURSE PROJECT 1 INSTRUCTIONS You have just been contracted as a new management trainee by Earrings...
COURSE PROJECT 1 INSTRUCTIONS You have just been contracted as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
SECTION A: READ THE PASSAGE AND ANSWER QUESTIONS 1-3 Emma, a monthly salaried worker, received 1,300...
SECTION A: READ THE PASSAGE AND ANSWER QUESTIONS 1-3 Emma, a monthly salaried worker, received 1,300 cedis as her net salary; she heard that this year’s inflation is at 18%. This situation caused prices to soar so high that she complained about everything she buys. In the previous year she was able to buy herself, dresses, a basket of foodstuffs, a small bag of oranges, a dozen of drinks and her transportation. However, this year, she couldn’t afford the full...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT