Question

Alphaget Inc., borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a three-month rollover basis from a London bank. If three-month LIBOR is 4 ½ percent over the first three-month interval and 5 3/8 percent over the second three-month interval, how much will Alphaget pay in interest over the first year of its Eurodollar loan?

Select one:

a. $43,057

b. $46,406

c. $47,658

d. $49,432

Answer 1

Given: Alphaget Co.Inc borrows $1,500,000 at libor plus a lending margin of 1.25% from London bank.

Libor: First 3 months is 4.5% & for second three month interval is 5 3/8

To Find: How much interest Alphaget paid in interest over the first year

Solution: Generally, Roll over loan is a type of loan which is automatically renewed when it is not repaid in full within a predefined loan term. Instead of entering into default, as would be the case with other types of loan, the debt is simply carried over to a new loan.

Here in this question we need to simply calculate interest paid by Alphaget co. over the first year, so for that calculation is mentioned below:

a) First three months interest calculation:

Interest rate: 4.5% + 1.25%= 5.75%

Interest amount: $1,500,000* 5.75%* 3/12

= $ 21562 (Approx.)

b) Second three months interest calculation:

Interest rate: 5 3/8 % + 1.25% = 5.375% + 1.25%= 6.625%

Interest amount: $1,500,000*6.625%*3/12

=$ 24844 (Approx.)

So total interest paid over the first year is

= $ 21562 + $ 24844 = 46406

Therefore option 'B' is correct.