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# 4) Dr. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate.

4)

Dr. Ruth is going to borrow \$6,500 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 7 percent and LIBOR 1.5 percent less. Also assume there will be a \$55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

 a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 Effective interest rate %

b.

Which loan has the lower effective interest cost?

 LIBOR

a) Prime Rate = 7%     LIBOR Rate = 7% - 1.50% = 5.50%     Total Interest = \$6500*5.50% + \$55 = \$357.50 + \$55 = \$412.50... View the full answer

A) To get the effective interest rate on LIBOR loan, we need to borrow \$6500 + \$55, or \$6555, to cover the fee as... View the full answer

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