Question 21.A.6: Interest on a Eurocredit Loan PROBLEM: Siemens Internationa...
Interest on a Eurocredit Loan
PROBLEM: Siemens International can borrow $5 million from HSBC at LIBOR plus a lending margin of 0.5 percent on a three-month rollover Eurocredit loan. Suppose that the prevailing annualized LIBOR rate is 4.0 percent and that over the next three-month period, the LIBOR rate is expected to increase to 4.125 percent. How much interest will Siemens have to pay HSBC for the Eurocredit loan for the first six months?
APPROACH: The total expected interest cost of the Siemens loan is the sum of the interest paid for the first three months plus the expected interest paid over the next three months.
Siemens’s annualized borrowing cost is 4.5 percent (4.0 + 0.5 = 4.5) for the first three-month period and is expected to be 4.625 percent (4.125 + 0.5 =4.625) for the next three-month period; thus, the total interest cost for the six-month period is as follows:
\begin{matrix} Total \ interest \ cost &=& (\$5,000,000 \times 0.045 \times 0.25 \ year)+(\$5,000,000 \times 0.04625 \times 0.25 \ year) \\ &=& 56,250.00 + \$57,812.50 \\ &=& \$114,062.50 \end{matrix}