Suppose a firm plans to borrow $5 million in 180 days. The loan will be taken out at whatever LIBOR is on the day the loan begins and will be repaid in one lump sum 90 days later. The firm would like to lock in the rate it pays, so it enters into a forward rate agreement with its bank. The bank agrees to lock in a rate of 12 percent. Determine the annualized cost of the loan for each of the following outcomes. Interest is based on 90 days and a 360-day year?
a. LIBOR in 180 days is 14 percent.
b. LIBOR in 180 days is 8 percent.