SECTION 3.3 SECTION 3.3

2.) If the 180-day LIBOR rate in 60 days is 2.25%, based on information in Exhibit 1, the

effective annual interest rate on Viewmont's USD50,000,000 loan is closest to:

A.

3%

B.

2%

C.

1%

Answer = B

Future value of call premium in 60 days = 150,000 [1+(0.015 + 0.005)(60/360)] =

USD150,500

Effective loan proceeds = 50,000,000 – 150,500 = USD49,849,500

Loan interest = 50,000,000 [(0.0225 + 0.005)(180/360)] = USD687,500

Call payoff = 50,000[Max(0, 0.0225 – 0.01)(180/360)] = USD312,500

Effective interest = 687,500 – 312,500 = USD375,000

Effective annualized loan rate = [(50,000,000 + 375,000)/49,849,500]

^(365/180)

– 1 = 0.0215,

or 2%

“Risk Management Applications of Option Strategies,” by Don M. Chance