One of Devon’s clients is planning to acquire a competing firm in 109 days. The acquisition will initially be financed by a USD 80,000,000 bridge loan with a term of 180 days and a rate of 180-day Libor plus 300 bps. Principal and interest will be paid at the end of the loan term. The client is concerned about a potential increase in interest rates before the initiation of the loan, and asks for advice on fully hedging this interest rate risk. A derivatives analyst at Devon advises the client to buy an interest rate call option on 180-day Libor with an exercise rate of 2.0% for a premium of USD 86,000. The call expires in 109 days and any payoff occurs at the end of the loan term. Current 180-day Libor is 2.2%. The client can finance the call option premium at current 180-day Libor plus 300 bps. At initiation of the loan 109 days later, 180-day Libor is 3.5%.

Calculate the effective annual rate (in bps) on the loan. Show your calculations.

**This question does give 109-day Libor. How to get the compounded cost of option premium in 109 days when option expires?**