Suggested Solutions for Tutorial 8

# Suggested Solutions for Tutorial 8 - 1 Suggested Solutions...

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1 Suggested Solutions for Tutorial 8 Please note that following suggested solutions are only very basic points and you need to read the textbook and other reference materials for better understanding. 2. The finance manager of a company has arranged a term loan for the company with the following conditions attached. The loan will have a variable rate of interest of LIBOR plus 75 basis points. The loan interest will be reset every three months for the duration of the loan. Explain the operation of these specific loan conditions. How would the finance manager obtain the new interest rate every three months? a term loan is a loan provided by a bank, or other financial institution, for a specific purpose, over a defined period of time the amount and period of the loan is specified in the loan contract a loan with a variable interest rate means that the interest rate charged on the principal amount outstanding will be reset periodically under the terms of the loan contract a variable rate loan contract will specify a reference interest rate various published reference rates are available including BBSW, LIBOR, USCP or an institution’s own prime rate the above loan is using LIBOR, the London Interbank Offered Rate, which is the adjusted rate at which banks in the London market will lend overnight funds the loan is set at LIBOR plus 75 basis points, therefore if LIBOR is currently 5.60% per annum then the loan interest rate will be 6.35% per annum both the borrower and the lender are able to find LIBOR published electronically daily by Reuters At the reset date each three months they will look up the relevant Reuter’s LIBOR 3-month money screen to ascertain the new rate 6. As the finance manager of a garden tools manufacturing company you approach your bank to obtain a term loan so that the company can buy a new metal pressing machine. The bank offers your company a loan of \$65 000 over a five-year period at a rate of interest of 7.40 per cent per annum, payable at the end of each month. Calculate the monthly loan instalment. ) 1

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## This note was uploaded on 08/30/2011 for the course AFF 1000 taught by Professor Chalmers during the Three '11 term at Monash.

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Suggested Solutions for Tutorial 8 - 1 Suggested Solutions...

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