Ignoring the commitment fee, what is the effective annual interest rate on this

Question

Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Suppose your firm immediately uses $219 million of the line and pays it off in one year. What is the effective annual interest rate on this $219 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.89 percent per quarter on any funds actually borrowed. 2. Maintain a 2 percent compensating balance on any funds actually borrowed. 3. Pay an up-front commitment fee of 0.21 percent of the amount of the line.

Explanation / Answer

Compensating balance = $ 400,000,000 * 2% = 8,000,000

Interest rate per quarter = 1.89%, Interest rate per year = 7.78%

[interest rate (on loan) x principal)] / principal

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