Question: Many loans to corporations are quoted today at small risk
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 Eurodeposits (currently trading at a rate of 4 percent) plus a one-quarter percentage point markup over LIBOR. APEX, however, wants the loan at a rate of 1.014 times LIBOR. If the bank agrees to this loan request, what interest rate will attach to the loan if it is made today? How does this compare with the loan rate the bank wanted to charge? What does this customer’s request reveal about the borrowing firm’s interest rate forecast for the next 90 days?
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