Carlos has applied for revolving credit line of $87,142,000 to assist in marketi
ID: 2732129 • Letter: C
Question
Carlos has applied for revolving credit line of $87,142,000 to assist in marketing a new product line. the terms of the loan will be as follows:
-ALL the loan will be discount loans -a commitment fee of .4 % on the unused portion of the loan will be charged.
-the compensatory balance requirements will be 5 percent on the total line of credit and there will be no charge on the outstanding loan
-the bank will pay 4 percent interest on demand deposits
-the rate of interest to be charged will be the prime rate plus 3 percent
-the credit line will be extended for a period of 5 years
The loan officer estimates that carlos will use about 27 percent of the credit line on average, if the prime rate is 8 percent and the required reserve rate on demand deposits is 14 percent. compute the effective cost to carlos
A 15.69%
B 15.89%
C 16.09%
D 16.29%
Explanation / Answer
Effective cost to Carlos = [0.4 x (1-0.27)] + 5 + (8+3)
= 16.29%