On 10 January, ResTex Ltd. determines that it will need to borrow $5 million on 15 February at 90-day Libor plus 300 basis points. The loan will be an add-on interest loan in which ResTex will receive $5 million and pay it back plus interest on 16 May.

To manage the risk associated with the interest rate on 15 February, ResTex buys an interest rate call that expires on 15 February and pays off on 16 May. The exercise rate is 5%, and the option premium is $10,000. The current 90-day Libor is 5.25%. Assume that this rate, plus 300 basis points, is the rate it would borrow at for any period of up to 90 days if the loan were taken out today. Interest is computed on the exact number of days divided by 360.

Determine the effective annual rate on the loan for each of the following outcomes:

1. 90-day Libor on 15 February is 6%.

2. 90-day Libor on 15 February is 4%.