Problem 16-13 Costs of Borrowing [LO3] You%u2019ve worked out a line of credit a
ID: 2699186 • Letter: P
Question
Problem 16-13 Costs of Borrowing [LO3]
You%u2019ve worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is 0.574 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a noninterest-bearing account. Assume that your bank uses compound interest on its line-of-credit loans.
What is the effective annual interest rate on this lending arrangement? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)
Suppose you need $15.20 million today and you repay it in seven months. How much interest will you pay? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)
You%u2019ve worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is 0.574 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a noninterest-bearing account. Assume that your bank uses compound interest on its line-of-credit loans.
Explanation / Answer
a) Actual loan amount available = $60 million*95% = 57 million Interest paid per month = 0.574%*60 million = 0.3444 million Effective monthly interest rate = 0.3444/57 = 0.60421% Effective annual rate = r (1+r) = (1+0.60421%)^12 r = 7.496% b)Let A be the amount paid in seven months $15.20 = A/(1+0.60421%)^7 A = 15.85465053 interest will you pay = 15.85465053-$15.20 = $0.6546 million