Finance Assignment | Professional Writing
Dr. Ruth is going to borrow $6,500 to help write a book. The loan is for one year and the money can be borrowed at either the prime rate or the LIBOR rate. Assume the prime rate is 7 percent and LIBOR 1.5 percent less. Also assume there will be a $55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).
a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
b. Which loan has the lower effective interest cost?