Carlos has applied for revolving credit line of $87,142,000 to assist in marketi
ID: 2732154 • 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 15.69% 15.89% 16.09% 16.29%Explanation / Answer
Effective cost to Carlos = Commitment fee + Compensatory balance requirement + Rate of interest
= [0.4 x (1-0.27)] + 5 + (8+3)
= 16.29%