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
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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F86ce596e-54dc-4fe9-b5de-f8c7633b4f97%2F4a620bae-e837-4da7-a1b7-e9675c472f32%2F5xhxorj_processed.jpeg&w=3840&q=75)
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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