Instel Corporation has been offered a $100 million, 3-month loan at a fixed rate of 90-day LIBOR plus 3/8 % margin or at the prevailing federal funds rate plus 1/2 % margin with the loan rate adjusted every 24 hours to the federal funds rate prevailing at the close of business each day. These rates, along with prevailing yields on U.S. Treasury bills, are posted by London and New York as follows:
90-day LIBOR rate on Eurodollar deposits 4.275% 3-month U.S. Treasury bill rate 4.12% Federal funds rate 4.08 6-month U.S. Treasury bill rate 4.20
One-month (30 day) U.S. Treasury bills 4.05 1-year U.S. Treasury bill rate 4.30 Which set of loan terms would you recommend to Instel's treasurer? Why?

Question

Instel Corporation has been offered a $100 million, 3-month loan at a fixed rate of 90-day LIBOR plus 3/8 % margin or at the prevailing federal funds rate plus 1/2 % margin with the loan rate adjusted every 24 hours to the federal funds rate prevailing at the close of business each day. These rates, along with prevailing yields on U.S. Treasury bills, are posted by London and New York as follows:
 90-day LIBOR rate on Eurodollar deposits 4.275% 3-month U.S. Treasury bill rate 4.12% Federal funds rate 4.08 6-month U.S. Treasury bill rate 4.20
 One-month (30 day) U.S. Treasury bills 4.05 1-year U.S. Treasury bill rate 4.30 Which set of loan terms would you recommend to Instel's treasurer? Why?

Quizplus · Accepted Answer

The Answer of Instel Corporation has been offered a $100 million, 3-month loan at a fixed rate of 90-day LIBOR plus 3/8 % margin or at the prevailing federal funds rate plus 1/2 % margin with the loan rate adjusted every 24 hours to the federal funds rate prevailing at the close of business each day. These rates, along with prevailing yields on U.S. Treasury bills, are posted by London and New York as follows:
 90-day LIBOR rate on Eurodollar deposits 4.275% 3-month U.S. Treasury bill rate 4.12% Federal funds rate 4.08 6-month U.S. Treasury bill rate 4.20
 One-month (30 day) U.S. Treasury bills 4.05 1-year U.S. Treasury bill rate 4.30 Which set of loan terms would you recommend to Instel's treasurer? Why?

Instel Corporation Has Been Offered a $100 Million, 3-Month Loan