Petrol Ibérico, a European gas company, is borrowing $750,000,000 via a syndicat

Question

Petrol Ibérico, a European gas company, is borrowing

$750,000,000

via a syndicated eurocredit for six years at

70 basis points over LIBOR. LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight leading investment bankers, which will charge up-front fees totaling

1.41 %

of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is

3.80 %

during the first six months and

4.00 %

during the second six months.

The effective interest cost for the first year is???.

(Round to two decimal places.)

Explanation / Answer

Proceeds = Borrowing (1-upfront Fees) = $750,000,000(1-0.0141)

= $739,425,000

Calcuate the Proceeds.

Proceeds = Borrowing (1-upfront Fees) = $750,000,000(1-0.0141)

= $739,425,000

Calculate the interest for first 6 months. Interest = Proceeds *((Libor+basis point)/2)) = $739,425,000*(0.038+0.007)/2) = $16,637,063. Calculate the interest for Last 6 months. Interest = Proceeds *((Libor+basis point)/2)) = $739,425,000*(0.040+0.007)/2) = $17,376,488. Total Interest Cost = $16,637,063+$17,376,488 = $34,013,551 Effective Interest Cost = (Interest Payments/Proceeds)*2*100 = ($34,013,551/$739,425,000)*2*100 = 9.2% annually.

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