Question

Petrol​ Ibérico, a European gas​ company, is borrowing ​$700,000,00 via a syndicated eurocredit for six years at 100 basis points over LIBOR. LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight leading investment​ bankers, which will charge​ up-front fees totaling 1.6​% of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 3.50​% during the first six months and 3.70​% during the second six months.

Answer 1

Step 1 -	Loan Proceeds = Loan Amount borrowed - Upfront Fees
	Loan Amount Borrowed	7,00,00,000
Less:	Up-front fees (70000000 x 1.6%)	11,20,000
	Loan Proceeds	6,88,80,000
Step 2 -	Applicable interest rate for the Year
		First 6 months	Next 6 Months
	LIBOR	3.50%	3.70%
Add:	100 Basis Point	1.00%	1.00%
	Interest Rate applied	4.50%	4.70%
Step 3 -	Interest Amount
		First 6 months	Next 6 Months
	Loan Amount Borrowed	70000000	70000000
	Interest Rate applied	4.50%	4.70%
	Interest (Loan amount x Interest Rate x 6/12)	1575000	1645000
	Total Interest paid for 1st year =	1575000+1645000=	3220000
Step 4 -	Effective Interest rate =	Interest paid/ Loan proceeds
	3220000/68880000 =	4.67%