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ABC International can borrow $4,000,000 at LIBOR plus a lending margin of 0.65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A. $50,000B. $100,000C. $118,000D. $120,000

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jepessoa

Answer:

C) $118,000

Explanation:

ABC International will have to pay the following interests:

  • for the first three month period:

$4,000,000 x (5.5% + 0.65%) x 1/4 = $61,500

  • for the second three month period:

$4,000,000 x (5% + 0.65%) x 1/4 = $56,500

total interest for the 6 month period = $61,500 + $56,500 = $118,000

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