You are the treasurer of Development Properties Ltd and are considering the funding of a project due for completion over the next six months. At the end of the six months payment will be received from the client for the total costs and the profit element, although a progress payment of £2m will be received in one month's time.

The funding of the project is maintained separately from the remainder of the funding of Development Properties and a special loan facility has been arranged at a cost of LIBOR + 1 /2 per cent p.a. £4m of costs require to be funded immediately and a further £5m in three months' time.

(a) Identify the cheapest method of borrowing overall for the project for the next six months.

(b) What factors would you consider if you believed interest rates would fall by 1 /4 per cent within the next month?

(c) What other mechanisms would you consider to manage the interest rate if you believed that interest rates might increase sharply over the next few weeks? (Association of Corporate Treasurers: Part II, September 1989, Paper in Liquidity Management)