(Floating-rate loans) After looking at a fixed-rate loan, Ace-Campbell Mfg. ente
ID: 2781151 • Letter: #
Question
(Floating-rate loans) After looking at a fixed-rate loan, Ace-Campbell Mfg. entered into a floating-rate loan agreement. This loan is set at 37 basis points (or 0.37 percent) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causing the loan to climb. That concern comes from the fact that the rate on the loan adjusts weekly based on the closing value of the LIBOR index for the previous week. Fortunately for Ace-Campbell, this loan has a maximum annual rate of 2.23 percent. It also has a minimum annual rate of 1.48 percent. Given the following information, calculate the interest rate that Ace-Campbell would pay during weeks 2 through 10. 9 Date Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 LIBOR 1.93% 1.61% 1.54% 1.38% 1.65% 1.64% 1.68% 1.86% 1 87%, The rate of interest for week 2 is 2.23 %. (Round to two decimal places.) The rate of interest for week 3 is D6. (Round to two decimal places.)Explanation / Answer
It is given in the question that the rate on the loan adjusts weekly based on the closing value of the LIBOR index for the previous week. So, to calculate the rate on the loan for a given week we will take the closing value of the LIBOR index for the previous week and add 37 basis points (or 0.37 percent) to it as the loan is set 37 basis points over LIBOR.
However, the rate on the loan for a given week cannot be greater than 2.23 and less than 1.48 percent as the maximum rate is 2.23 percent and minimum rate is 1.48 percent.
Rate of Interest for week 2 = Closing value of LIBOR for week 1 + 0.37%
= 1.93% + 0.37%
= 2.3%
Because this is greater than 2.23%, so the rate of interest for Week 2 = 2.23%
Rate of Interest for week 3 = Closing value of LIBOR for week 2 + 0.37%
= 1.61% + 0.37%
= 1.98%
Rate of Interest for week 4 = Closing value of LIBOR for week 3 + 0.37%
= 1.54% + 0.37%
= 1.91%
Rate of Interest for week 5 = Closing value of LIBOR for week 4 + 0.37%
= 1.38% + 0.37%
= 1.75%
Rate of Interest for week 6 = Closing value of LIBOR for week 5 + 0.37%
= 1.65% + 0.37%
= 2.02%
Rate of Interest for week 7 = Closing value of LIBOR for week 6 + 0.37%
= 1.64% + 0.37%
= 2.01%
Rate of Interest for week 8 = Closing value of LIBOR for week 7 + 0.37%
= 1.68% + 0.37%
= 2.05%
Rate of Interest for week 9 = Closing value of LIBOR for week 8 + 0.37%
= 1.86% + 0.37%
= 2.23%
Rate of Interest for week 10 = Closing value of LIBOR for week 9 + 0.37%
= 1.87% + 0.37%
= 2.24%
Because this is greater than 2.23%, so the rate of interest for Week 10 = 2.23%
Summarised Answers
Week Rate Of Interest Week 2 2.23% Week 3 1.98% Week 4 1.91% Week 5 1.75% Week 6 2.02% Week 7 2.01% Week 8 2.05% Week 9 2.23% Week 10 2.23%Related Questions
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