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?

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?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 20QA

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