Question

I Interest Rate Settings and Calculations A company borrowed $300 million from a bank for two years at 3-month LIBOR+1.5%, beginning July 9 (this week). There is no amortization. Fill in the table below. In the first column you need to write the day of the month, being careful of possible non-banking days. The second column gives you the LIBOR scenarios for that day. Then write the interest rate and the interest payment for those dates. date 3-mo LIBOR interest rate interest payment

July 8 1%

Oct 1.5%

Jan 2021 1.75%

April 2%

July 2.25%

Oct 2.4%

Jan 2022 2.5%

April 2.55% July 2.6%

I am assuming there is a day rate involved her but I do not understand how I supposed to determine what that number is

Answer 1

Note:

1. The Loan was taken on 9th Jul 20. Hence interest for the 1st quarter will be for the period 9-Jul-20 to 9-Oct-20 for 93 days (including 9th Jul 20 and hence the formula for number of days is added with '+1")

2. The year has 365 days. Hence the days interest is calculated as applicable interest rate * number of days in the quarter / 365

3. Since its a two year loan, last day of the loan will be 8th Jul 2022

4. The rate given for Jul-22 is not relevant as the loan's period is till 8th Jul 2022.

5. Assumed principal will be re-paid on the last day - that is on 8th Jul 2022

6. If the quarter ending date falls on a saturday, the interest date is moved by +2 days and if it falls on a sunday, it is moved by +1 day.