Ignoring the commitment fee, what is the effective annual interest rate on this
ID: 2646730 • Letter: I
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
a) Effective Interest Rate on 1.89% Per Quarter: [1 + (i/n)n - 1]
Effective Interest Rate on 1.89% Per Quarter = 7.777% + 2% of 7.777% on Compensating Balance = 7.94%
b) Amount Borrowed = $219 Million
Amount Actually Received = 219 x 2% = $4.38 Million (Compensating Balance)
0.21% Commitment Fees = 219 x 0.21% = $0.46 Million
Amount Actually Received = 219 - 4.38 - 0.46 = $214.16 million
Per Year Interest Paid = 219 x 7.94% = $17.389 million
Effective Interest Rate = 17.389 / 214.16 = 8.12%