Question

 The Bensington Glass Company entered into a loan agreement with the​ firm's bank to finance the​ firm's working capital. The loan called for a floating rate that was 27 basis points ​(0.27

​percent) over an index based on LIBOR. In​ addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.25

percent and a minimum of 1.74 percent. Calculate the rate of interest for weeks 2 through 10.

Week 1	1.91​%
Week 2	1.66​%
Week 3	1.51​%
Week 4	1.37​%
Week 5	1.56​%
Week 6	1.67​%
Week 7	1.67​%
Week 8	1.89​%
Week 9	1.92​%

Answer 1

As per the data given in the question,

The maximum cap rate = 2.25% (ceiling rate)

The minimum cap rate = 1.74% (floor rate)

The Floating rate = 0.27%

The rates of interest for weeks 2 through 10 can be calculated as follows :-

The rate of interest of a week is given by :- Previous Week LIBOR + Floating Basis Points

Week 2 Rate of Interest = Week 1 LIBOR + 0.27% = (1.91% + 0.27%) = 2.18%

Week 3 Rate of Interest = Week 2 LIBOR + 0.27% = (1.66% + 0.27%) = 1.93%

Week 4 Rate of Interest = Week 3 LIBOR + 0.27% = (1.51% + 0.27%) = 1.78%

Week 5 Rate of Interest = Week 4 LIBOR + 0.27% = (1.37% + 0.27%) = 1.64%

The Week 5 rate of interest is lower than the floor rate / min. cap rate i.e. 1.74%. Hence, the Week 5 rate of interest should be 1.74%.

Week 6 Rate of Interest = Week 5 LIBOR + 0.27% = (1.56% + 0.27%) = 1.83%

Week 7 Rate of Interest = Week 6 LIBOR + 0.27% = (1.67% + 0.27%) = 1.94%

Week 8  Rate of Interest = Week 7 LIBOR + 0.27% = (1.67% + 0.27%) = 1.94%

Week 9 Rate of Interest = Week 8 LIBOR + 0.27% = (1.89% + 0.27%) = 2.16%

Week 10 Rate of Interest = Week 9 LIBOR + 0.27% = (1.92% + 0.27%) = 2.19%