ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A)$50,000
B)$100,000
C)$118,000
D)$120,000

Question

Quizplus · Accepted Answer

First, we need to calculate the lending margin per day: 0.65% / 360 days = 0.0018%.
Then, for the first three-month interval, the interest rate will be:
LIBOR + lending margin = 5.5% + 0.65% = 6.15%
The interest for this interval will be:
$4,000,000 * 6.15% * 90/360 = $61,500
For the second three-month interval, the interest rate will be:
LIBOR + lending margin = 5.0% + 0.65% = 5.65%
The interest for this interval will be:
$4,000,000 * 5.65% * 90/360 = $56,250
Therefore, the total interest paid over the six-month period will be:
$61,500 + $56,250 = $117,750
Rounding up, the answer is C) $118,000.

ABC International Can Borrow $4,000,000 at LIBOR Plus a Lending