Dr. Ruth is going to borrow $7,200 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 12 percent and LIBOR 2.5 percent less. Also assume there will be a $45 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?
b. Which loan has the lower effective interest cost? (Use 360 days in a year.)
Prime
LIBOR