General Motors has agreed to a syndicated eurocredit loan with the following terms: A revolving loan of $100,000,000 with an up-front fee of 2% of the principal and an interest rate of LIBOR plus 75 basis points. If the payments are made every six months and the current LIBOR rate is 4.00%, what is the effective annual cost of this loan?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest rate by adding the LIBOR rate and the basis points:

LIBOR + 75 basis points = 4.00% + 0.75% = 4.75%

Next, we need to convert the semi-annual interest rate to an effective annual rate. We can do this using the following formula:

Effective annual rate = (1 + semi-annual rate)^2 - 1

Plugging in the semi-annual rate of 4.75%, we get:

Effective annual rate = (1 + 0.0475)^2 - 1
Effective annual rate = 0.0485 or 4.85%

Therefore, the effective annual cost of this loan is 4.85%, making choice B the correct answer.

General Motors Has Agreed to a Syndicated Eurocredit Loan with the Following