Determine the effective rate on loan with and without call

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Reference no: EM132068763

A firm plans to borrow $40 million in 20 days at 60-day LIBOR plus 100 basis points. 60 days later the loan and the interest should be paid. The firm expects interest rates to increase so that aims to protect against increases but also benefit from a decrease in interest rates. In line with its aim, the firm considers an interest rate call (where the factor for both loan and call is 60/360). The call has an exercise rate of 13% and costs $18,000. It is given that 20-day rate is 13.5%. On day 20, the LIBOR is announced to be 15%. Determine the effective rate on loan with and without the call.

Reference no: EM132068763

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