Question: Suppose that Gwynn s Island Savings Association has recently granted a
Suppose that Gwynn’s Island Savings Association has recently granted a loan of $2 million to Oyster Farms at prime plus 0.5 percent for six months. In return for granting Oyster Farms an interest-rate cap of 6.5 percent on its loan, this thrift has received from this customer a floor rate on the loan of 5 percent. Suppose that, as the loan is about to start, the prime rate declines to 4.25 percent and remains there for the duration of the loan. How much (in dollars) will Oyster Farms have to pay in total interest on this six-month loan? How much in interest rebates will Oyster Farms have to pay due to the fall in the prime rate?
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