Advantages
of Floating Rate of Interest
Advantages of floating
rate of interest are that you may require paying lower amount, if the interest
rate falls or goes down. It means that you may require to pay amount lower than
your expectations.
Example
ABC Company borrowed 2
million at LIBOR + 2 %, company was expecting that labor would remain 5%, but
actual labor came down to 3%.
Expected
Interest (5%+2%) x 2,000,000 = 140,000
Actual
Interest (3%+2%) x 2,000,000 =
100,000
Advantage=
140,000-100,000 = $ 40,000
Disadvantage
of Floating Rate of Interest
Disadvantage of floating
rate of interest is that you may have to pay more than you are expecting to
pay, and you will face difficulty to arrange this extra amount.
Example
For example you have
borrowed 1 million dollar, predicting that interest rate would remain in single
digit, but if rate crosses the single digit. Your bad time starts.
Maximum
Interest Cost 1,000,000 x .09 = 90,000
Actual
Interest Cost 1,000,000 x 12% = 120,000
Excess
cost 120,000-90,000 = $ 30,000
One have not planned for this extra $
30,000, therefore you may face some serious difficulties to arrange this $
30,000.
