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Determine the effective annual rate on the loan

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Question

On 10 January 2018, a company determined that they will need to borrow R2 million on 15 February 2018 at the 90-day LIBOR plus 200 basis points (36 days). The loan is an add-on interest loan and they will receive R2 million and have to pay it back on 16 May 2018 plus interest. In order to manage the risk of the interest rate on 15 February, the company buys an interest rate call that expires on 15 February and pays off on 1 May. The option premium is R9,000 and the exercise rate is 5%. The current 90-day LIBOR is 5.35%. This rate plus 200 basis points is the rate at which this company can borrow money for any period of 90-days if the loan was taken out today.

Determine the effective annual rate on the loan if the 90 day LIBOR on 15 February is 6%

Reference no: EM132370250

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