Reading 42 - Concept Checker #9 understand, effective, receiving, believe, correct

jcole21

When calculating the effective annual rate of the loan if LIBOR is 4.5% at expiration, I don’t understand why you are ADDING the $2,020 to the denominator instead of subtracting it.
I believe you would subtract it if you were receiving the money (borrower), but this example you are the lender. However, buying the put should still be a cost to you, correct? So in that case, why would you be adding it?

busterbluth

Paying the put premium are costs for you.
So you have to add the premium to the amount of money you lend because this is then the basis for calculating the effective interest you earn.

random_walker47

And that’s how lender will earn less returns (after including the cost of buying a put option)