Ignoring the commitment fee, what is the effective annual interest rate on this
ID: 2714298 • 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 $228 million of the line and pays it off in one year. What is the effective annual interest rate on this $228 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 $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.98 percent per quarter on any funds actually borrowed. 2. Maintain a 3 percent compensating balance on any funds actually borrowed. 3. Pay an up-front commitment fee of 0.22 percent of the amount of the line.Explanation / Answer
a) Effective annual rate = {Principal loan * intereest rate} / {Principal loan - compensation Balance}
= ($ 400000000 * 7.92%) / ($400000000 - $ 12000000)
= $31680000 /$388000000
= 8.16%
Note: interets rate =1.98%per quarter ,so
Annually = 1.98% * 4
= 7.92%
Compensation Balance = Maintain a 3 percent compensating balance on funds actually borrowed.
= 3% * $400000000
= $12000000