Petrol? Ibérico, a European gas? company, is borrowing ?$550,000,000 via a syndi

Question

Petrol? Ibérico, a European gas? company, is borrowing ?$550,000,000 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 1.1?% of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 4.10?% during the first six months and 4.30?% during the second six months.

The effective interest cost for the first year is

?(Round to two decimal? places.)

Explanation / Answer

In order to calculate the effective interest cost, let us calculate the amount of interest for the two semi-annual periods. Also, in first year, there would be a 1.1% (of principal) fees to be paid.

Fees = 1.1% * $550,000,000 = $6,050,000

Interest Rate in First Semi-annual period = 4.10% + 0.70% = 4.80%

Interest expense = 4.80% * $550,000,000 * (1/2) = $13,200,000 (1/2 signify semi-annual period)

Interest Rate in Second Semi-annual period = 4.30% + 0.70% = 5.00%

Interest expense = 5.00% * $550,000,000 * (1/2) = $13,750,000

Total cost in year 1 = 6,050,000 + 13,200,000 + 13,750,000 = $33,000,000

Efective interest rate for first year = $33,000,000/$550,000,000 = 6.00% --> Answer

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