Question
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 2.00%. The LIBOR rate will be reset each year at
Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 2.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%. |
Polaris buys the forward rate agreement (FRA) from an insurance company. According to the contract, if LIBOR rises above 4%, the initial forecast, the insurance company would pay to Polaris at the end of each year the difference between the LIBOR and 4%. In the opposite case, i.e., if LIBOR falls below 4%, Polaris would pay the difference between 4% and real LIBOR to the insurance company. The purchase of the forward rate agreement will cost $200,000, paid at the time of the initial loan. Calculate the all-in-cost (AIC) of the loan based on the assumption that the LIBOR rate jumps to 5.00% after the first year.
7.11%
7.33%
7.60%
7.84%
8.12%
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