P9-1 (similar to) Question Help (Related to Checkpoint 9.1) (Floating-rate loans
ID: 2802303 • Letter: P
Question
P9-1 (similar to) Question Help (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 2.17 percent and a minimum of 1.75 percent. Calculate the rate of interest for weeks 2 through 10 Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 LIBOR 1.96% 1.66% 1.49% 1.36% 1.57% 1.63% 1. 73% The rate of interest for week 2 is 1 %. (Round to two decimal places.)Explanation / Answer
The rate of interest for weeks 2 can be calculated in following manner-
The rate of interest for weeks 2 = LIBOR index for previous week + floating rate adjustment; (Subject to maximum 2.17% and minimum 1.75% per year)
Where,
LIBOR index for previous week (that is week 1) = 1.96%
Floating rate adjustment = 29 basis points or 0.29%
Therefore,
The rate of interest for weeks 2 = 1.96% + 0.29%
= 2.25% but we have maximum limit of 2.17%
Therefore,
The rate of interest for weeks 2 = 2.17%
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