As the assistant treasurer of a large corporation, your job is to look for ways your company can lock in its cost of borrowing in the financial markets. The date is June 28. Your firm is taking out a loan of $20 million, with interest to be paid on September 28, December 31, March 31, and June 29. You will pay the LIBOR in effect at the beginning of the interest rate cap with a strike of 10 percent and a premium of $70,000. Determine the cash flows over the life of this loan if LIBOR turns out to be 11 percent on September 28, 11.65 percent on December 31, and 12.04 percent on March 31. The payoff is based on the exact number of days and a 360-day year.

Optional: If you have a financial calculator or a spreadsheet with an IRR function, solve for the internal rate of return and annualize it to determine the effective cost of borrowing.

Interest Cap Principal Net Without Cap Net

Date Days LIBOR Due Payment Repayment Cash Flow Cash Flow

6/28 10.00 70,000 0 19,930,000 20,000,000

9/28 92 11.00

12/31 94 11.65

3/31 90 12.04

6/29 90