Many loans to corporations are quoted today at small risk premiums and profit margins over the London Interbank Offered rate (LIBOR). Englewood Bank has a $25 million loan request for working capital to fund accounts receivable and inventory from one of its largest customers, APEX Exports. The bank offers its customer a floating-rate loan for 90 days with an interest rate equal to LIBOR on 30-day Euro deposits (currently trading at a rate of 4 percent) plus a one-quarter percentage point markup over LIBOR.

(1) What loan rate would the bank offer?

(2) If APEX wants the loan at a rate of 1.014 times LIBOR and the bank agrees to this loan request, what interest rate will attach to the loan if it is made today?

3) What does this customers request reveal about the borrowing firms interest rate forecast for the next 90 days?

Hint: Use the price leadership model. Show your works.