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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


Top Answer

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

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Other Answers

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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