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Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%?

Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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what will be interest paid at end of term?

### Loan Interest Calculation Exercise Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%? **Interest paid = $ [ ? ]** *Note: Round to the nearest hundredth.* #### Breakdown: - **Loan Term:** 3 months - **Loan Amount:** $450,000 - **Business Risk Percentage:** 2.0% - **LIBOR (London Interbank Offered Rate):** 2.1% To calculate the interest paid on the loan, combine the business risk percentage and the LIBOR rate to determine the total interest rate. Apply this rate to the principal amount of $450,000, adjusting for the 3-month term. The formula to compute the interest paid is: \[ \text{Interest Paid} = \text{Principal} \times \left( \frac{\text{Total Interest Rate}}{100} \right) \times \left( \frac{\text{Duration in Months}}{12} \right) \] 1. **Calculate the Total Interest Rate:** \[ \text{Total Interest Rate} = \text{Business Risk Percentage} + \text{LIBOR} \] \[ \text{Total Interest Rate} = 2.0\% + 2.1\% = 4.1\% \] 2. **Convert the Annual Interest Rate to a 3-month Rate:** The interest calculation needs to be proportionate to the loan term. \[ \text{Total Interest Rate for 3 Months} = 4.1\% \times \left( \frac{3}{12} \right) \] \[ \text{Total Interest Rate for 3 Months} = 4.1\% \times 0.25 = 1.025\% \] 3. **Calculate the Interest Paid:** \[ \text{Interest Paid} = \$450,000 \times \left( \frac{1.025}{100} \right) \] \[ \text{Interest Paid} = \$450,000 \times 0.01025 \] \[ \text{Interest Paid} = \$4,612.50 \] Therefore, the interest paid at the
Transcribed Image Text:### Loan Interest Calculation Exercise Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%? **Interest paid = $ [ ? ]** *Note: Round to the nearest hundredth.* #### Breakdown: - **Loan Term:** 3 months - **Loan Amount:** $450,000 - **Business Risk Percentage:** 2.0% - **LIBOR (London Interbank Offered Rate):** 2.1% To calculate the interest paid on the loan, combine the business risk percentage and the LIBOR rate to determine the total interest rate. Apply this rate to the principal amount of $450,000, adjusting for the 3-month term. The formula to compute the interest paid is: \[ \text{Interest Paid} = \text{Principal} \times \left( \frac{\text{Total Interest Rate}}{100} \right) \times \left( \frac{\text{Duration in Months}}{12} \right) \] 1. **Calculate the Total Interest Rate:** \[ \text{Total Interest Rate} = \text{Business Risk Percentage} + \text{LIBOR} \] \[ \text{Total Interest Rate} = 2.0\% + 2.1\% = 4.1\% \] 2. **Convert the Annual Interest Rate to a 3-month Rate:** The interest calculation needs to be proportionate to the loan term. \[ \text{Total Interest Rate for 3 Months} = 4.1\% \times \left( \frac{3}{12} \right) \] \[ \text{Total Interest Rate for 3 Months} = 4.1\% \times 0.25 = 1.025\% \] 3. **Calculate the Interest Paid:** \[ \text{Interest Paid} = \$450,000 \times \left( \frac{1.025}{100} \right) \] \[ \text{Interest Paid} = \$450,000 \times 0.01025 \] \[ \text{Interest Paid} = \$4,612.50 \] Therefore, the interest paid at the
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