Carlos has applied for revolving credit line of $14,200,00 to assist in marketin
ID: 2732127 • Letter: C
Question
Carlos has applied for revolving credit line of $14,200,00 to assist in marketing a new product line. the terms of the loan will be as follows:
-the loan will be not a discount loan
-no commitment fee on the unused portion of the loan will be charged.
-the compensatory balance requirements will be 0 percent on the outstanding loans; 0 percent on the total line of credit
-the bank will pay 5 percent interest on demand deposits -the rate of interest to be charged ill b the prime rate plus 2 percent
-the credit line will be extended for a period of nine years.
The loan officer estimates that carlos will use about 48 percent of the credit line on average, if the prime rate is 12 percent and the required reserve rate on demand deposits is 20 percent. compute the effective yield for the bank.
A.13.60
B.13.80
C.14.00
D.14.20
Explanation / Answer
Ans C.
Effective cost to Carlos = Rate of interest to be charged
= Prime lending rate + 2%
= 12+2
= 14%