Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap.The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to
A)computing the Black-Scholes-Merton option call price
B)computing the net present value
C)computing the internal rate of return
D)computing the Black commodity option call price
E)computing the WACC

Question

Quizplus · Accepted Answer

Computing the internal rate of return (IRR) is the methodology equivalent to finding the effective annual rate actually paid on a loan with an interest rate cap. The IRR method takes into account the cash flows associated with the loan payments and the costs of the interest rate cap to determine the overall cost of the loan on an annual basis.

Suppose You Have a Floating Rate Loan Tied to 90-Day