Dr. Ruth is going to borrow $6,500 to help write a book. The loan is for one year and the money can either be borrowed at 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).
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.)
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Which loan has the lower effective interest cost?
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