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What portion of the cost of the loan is at risk of changing?

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Southpole is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%.

a) What is the all-in-cost (i.e., the internal rate of return) of the Southpole loan including the LIBOR rate, fixed spread and upfront fee?

b) What portion of the cost of the loan is at risk of changing?

c) If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e., the internal rate of return) for Southpole for the entire loan?

d) If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e., the internal rate of return) for Southpole for the entire loan?

Reference no: EM13864436

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