On June 30 of this year, Mega Bank granted Lang Corporation a $20 million 5-year term loan with a floating rate of 200 basis points over Treasury Bill... Accounting MCQs | Accounting MCQs

On June 30 of this year, Mega Bank granted Lang Corporation a $20 million 5-year term loan with a floating rate of 200 basis points over Treasury Bill rates, payable quarterly. The loan principal is to be repaid in equal quarterly installments over the term. If Treasury Bills are expected to yield 6% for the rest of the year, how much will Lang pay to Mega Bank in the last half of this year?

$1,800,000
$2,780,000
$2,800,000
$3,170,000Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (B) is correct. A basis point is one-hundredth of 1%. Thus, the rate on the term loan is 8% [6% treasury bill rate + 200 basis points (2%)]. The first quarterly payment consists of principal of $1,000,000 and interest of $400,000 [($20,000,000 × 8%) × (3 ÷ 12 months)], a total of $1,400,000. The second quarterly payment consists of principal of $1,000,000 and interest of $380,000 [($20,000,000 – $1,000,000) × 8% × (3 ÷ 12 months)], a total of $1,380,000. The total payments in the second half of the year are therefore $2,780,000 ($1,400,000 + $1,380,000).