Calculate the effective borrowing rates of the loan

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Reference no: EM131300257

On March 1, a firm plans to borrow $10 million for 90 days beginning on April 1(31 days in the future, which is the maturity of the call). It can currently borrow at LIBOR plus 200 basis points, and LIBOR is currently 4.5%. The firm buys an interest rate call option where LIBOR is the underlying, and the strike rate is 4%. The notional principal is $10 million, and D=90 days, which is also the length of the loan. The premium of the call is $5,000. Calculate the effective borrowing rates of the loan when LIBOR is 2.0%, 3.5%, 4.0%, 4.5% and 6%.

Reference no: EM131300257

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