Determine your annualized return on the loan

Reference no: EM13925816

You are a funds manager for a large bank. On April 15, your bank lends a corporation $35 million, with interest payments to be made on July 16, October 15, January 16, and next April 16. The amount of interest will be determined by LIBOR at the beginning of the interest payment period. On April 15, LIBOR is percent. Your forecast is for declining interest rates, so you anticipate lower loan interest rev- enues. You decide to buy an interest rate floor with a strike set at 8 percent and a premium of $60,000. Determine the cash flows associated with the loan if LIBOR turns out to be 7.9 per- cent on July 16, 7.7 percent on October 15, and percent next January 16. The payoff is based on the exact number of days and a 360-day year. If you have a financial calculator or spreadsheet with an IRR function, determine the internal rate of return and annualize it to determine your annualized return on the loan.

Reference no: EM13925816

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