If the current interest rate is 5% and your semi-annual coupon paying bond has a duration of 5.33 years, how much will the price
1 answer:
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Answer:
Ans.
a. The effective interest rate on the LIBOR loan is 8.95%
b. The loan with the lower effective rate is the LIBOR.
Explanation:
Hi, well, the Prime loan is pretty straight forward, the cost is 9%, on the other hand, the LIBOR loan requires some work. First, we have to find the future value of the loan, that is:
That is:
In order to find the effective rate of the loan, and knowing that it is going to be paid one year from now, we need to use the following formula.
So, the cost of the LIBOR loan is 8.95% effective annual, and still lower than the PRIME loan.
Best of luck.