A financial firm plans to borrow $75 million in the money market at a current interest rate of 4.5% per annum. However, the borrowing rate will float with market conditions. To protect itself, the firm has purchased an interest-rate cap of 5% per annum to cover this borrowing. If money market interest rates on these funds suddenly climb to 5.5% per annum as the borrowing begins, how much in total interest will the firm owe and how much of an interest rebate will it receive assuming the borrowing is only for one month?

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Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.