Captain Spaulding's Imports currently has a $25,000,000 loan at a floating rate of 30 day LIBOR plus 5.50%. He thinks that interest rates are going to go down, but does not want to take a chance on rising rates. 30 day LIBOR is currently 3%, so you are paying 8.50% (3.00% LIBOR plus the spread of 5.50%). Alexandra suggests that the Captain purchase a cap on LIBOR at 4.50% for $225,000 per year.

If LIBOR goes to 5%, what is the net payment? Show the cash flows.

What is the maximum effective interest rate with the cap?

Answer rating: 100% (QA)

If LIBOR goes to 5 the net payment for the loan will be calculated as f... View the full answer