Question

Petrol​ Ibérico, a European gas​ company, is borrowing ​$500,000,000 via a syndicated eurocredit for six years at 110 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 1.4​% of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 4.50​% during the first six months and 4.70​% during the second six months. -The effective interest cost for the first year is ___​%. ​(Round to two decimal​ places.)

Answer 1

		Amount of borrowing	$500,000,000
		Interest rate first six month=0.5 year	5.60%	(4.5+1.1)
		Future Value after six months	$513,809,303.15	(500000000*(1.056^0.5))
		Interest rate Second six month=0.5 year	5.80%	(4.7+1.1)
	FV	Future Value of borrowing after 1 year	$528,499,763.48	(513809303.15^(1.058^0.5)
		Amount of borrowing	$500,000,000
		Up front fees charged	$7,000,000	(500000000*0.014)
	PV	Present value of Net Borrowing	$493,000,000	(500000000-7000000)
		Assume effective interest rate=r
		FV=PV*(1+r)
		1+r=FV/PV=(528499763.8/493000000)	1.072007634
		r=1.072007634-1=	0.072007634
		Effective Interest Rate	0.072007634
		Effective Interest Rate in percentage	7.20%	(rounded to two decimal places)
		The effective interest cost for the first year is	7.20%