Related to Checkpoint 91 Floatingrate loans The Bensington G

(Related to Checkpoint 9.1) (Floating-rate loans) The Bensington Glass Company entered into a loan agreement with the firm\'s bank to finance the firm\'s working capital. The loan called for a floating rate that was 29 basis points (0.29 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.21 percent and a minimum of 1.73 percent. Calculate the rate of interest for weeks 2 through 10 Date Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 LIBOR 1.93% 1.65% 1.46% 1.34% 1.61% 1.67% 1.66%

Solution

In this question, the interest rate for the week would be LIBOR + 29bps, subject to a minimum of 1.73% (floor)rate and a maximum of 2.21% (ceiling)

Week 2: 1.65% + 0.29% = 1.94%

Week 3: 1.46% + 0.29% = 1.75%

Week 4: 1.34% + 0.29% = 1.63%. This is lower than floor rate, so rate charged would be 1.73%

Week 5: 1.61% + 0.29% = 1.90%

Week 6: 1.67% + 0.29% = 1.96%

Week 7: 1.66% + 0.29% = 1.95%

Week 8: 1.95% + 0.29% = 2.24%. This is higher than ceiling rate. Hence rate charged = 2.21%

Week 9: 1.88% + 0.29% =2.17%

{Week 10 interest rate not visible here, but use the same logic to calculate that}