Loan pricing: Zylex Company's German unit is looking to borrow €4.5 million from Deutsche Bank. Deutsche Bank quotes a rate of three-month LIBOR plus 0.5 per cent for the 90-day loan. Currently, the three-month LIBOR is 4.175 per cent. If the exchange rate on the pay-off date is €0.8334/$, what is the dollar cost of the loan?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest rate for the loan: 
3-month LIBOR + 0.5% = 4.175% + 0.5% = 4.675%
Next, we calculate the interest that will be paid on the loan: 
€4,500,000 x 4.675% = €210,375
To convert this to dollars, we use the given exchange rate, €0.8334/$: 
€210,375 ÷ 0.8334/$ = $252,447.85
Finally, we subtract the original loan amount to get the dollar cost of the loan: 
$252,447.85 - $189,340.40 = $63,107.45, which is Option A.

Loan Pricing: Zylex Company's German Unit Is Looking to Borrow